A large majority of global banks, insurers and investment managers intend to increase their partnerships with FinTech companies over the next 3 - 5 years and expect an average return on investment of 20% (26% in Russia) on their innovation projects, according to a new PwC report Redrawing the lines: FinTech’s growing influence on Financial Services.
The report shows clear signs the finance industry is getting to grips with innovation. One driving factor behind these partnerships is an increasing fear within the industry that revenue is at risk to standalone FinTechs, with 88% of financial services respondents seeing it as a real threat (83% in 2016). On average, up to 24% of revenue is thought to be at risk.
According to 72% of respondents globally and 88% in Russia, FinTech companies will make a significant impact (or breakthrough) in the retail banking sector within the next five years.
Almost half (46%) of the Russian respondents believe that one of the most important trends in the next five years will be the enhancement of credit underwriting techniques that use non-traditional metrics to determine the creditworthiness of applicants. In addition, 62% of Russian respondents view the enhancement of these procedures as a response to emerging FinTech trends that are likely to dominate the banking industry over the next five years. According to 80% of Russian respondents, an important trend in capital markets is the shift from technology-enabled client relationships to those based on integrated digital communication channels. The increasing sophistication of data models and analytics for identifying and quantifying risk is an important trend for the insurance industry, according to 60% of Russian respondents. As for asset management, 75% of the respondents in this segment believe that the emergence of new services and solutions for clients who are not served (or who are under-served) is an important trend.
The survey also shows that payment services are seen as having the greatest risk of being taken over by FinTech companies, as 81% of Russian respondents and 68% of respondents worldwide believe this to be true. According to 80% of worldwide respondents and 84% of Russian respondents, the most effective strategy for companies seeking to retain clients and compete with Fintech companies is to focus on ease of use and intuitive product design.
Among the challenges that traditional financial companies face in dealing with FinTech companies, 60% of Russian respondents and 58% of global respondents mention information security, while 54% of respondents globally and 50% in Russia also mention regulatory uncertainty. At the same time, international FinTech companies report that differences in management and culture (55%) and regulatory uncertainty (48%) are the biggest challenges that they face in dealing with traditional financial companies. In Russia, FinTech companies unanimously (100%) agree that the biggest challenges include the compatibility of IT systems, regulatory uncertainty and the necessity of financial investments.
According to the survey results, the main threats posed by the rise of the FinTech sector to incumbent market players are the loss of market share (68% in Russia, 57% globally) and the growing intensity of price competition (55% in Russia, 63% globally).
The report shows that partnering with FinTechs will be a key way for firms to outsource parts of their R&D and bring their strategy to life, ultimately allowing them to offer new products to customers much more quickly.
Among the key opportunities enabled by the rise of the FinTech sector, companies cite greater possibilities to expand products and services (65% in Russia and 60% globally) and to leverage existing data and analytics (52% in Russia and 46% globally).
Start-ups applying AI to financial services have been funded extensively, receiving an average funding of $1 billion annually over the last two years, according to data from PwC’s DeNovo platform. The report shows that AI, and the data and analytics tools behind it, will be used by banks, fund managers and insurers to coach their customers through daily interactions on the best financial decisions for them.
Over the next year, market players plan to invest primarily in data analytics (76% in Russia and 74% in the world) and mobile services (60% in Russia and 51% in the world). Mobile money services are becoming a gateway for accessing populations previously unserved by banks. PwC predicts that using mobile technology to help new customers gain access to finance could open up a demographic worth $3 trillion to the payments industry.
The report makes it clear that blockchain is moving from hype to reality and real life use cases are set to become much more common. With the potentially huge back-office cost savings and transparency gains blockchain can provide, the technology will receive increasing investment as finance firms explore its ability to ensure they are fit for future growth.
Survey respondents believe the most likely use cases for blockchain will be payments, funds transfer and digital identity management. Opinions around use cases for blockchain vary by country, often driven by the level of development in the technology in each geography. Respondents from the United States cite funds transfer infrastructure as the most likely business use case, probably explained by the maturity of blockchain investment already undertaken there. In Russia, the most likely business-use cases for blockchain, according to 77% of respondents, are in digital identity management, followed by digital payments (73%) and digital money transfer (55%). According to 36% of Russian respondents, one of the most important blockchain trends for the banking industry over the next five years will be the use of advanced methods, tools and technologies to improve information security and to predict, detect and analyse fraud.
1. PwC’s 2017 Global FinTech Survey is based on the responses of 1,308 participants, principally CEOs, Heads of Departments, Heads of Innovation, Heads of IT/ Digital/ Technology from 71 countries spread across six regions and a variety of industries including banking, asset management, fund payments, insurance, reinsurance and FinTech. The majority of respondents are from large companies, but small and medium sized companies also took part in the survey.
2. The survey also includes insights and proprietary data from PwC’s DeNovo platform. DeNovo provides on-demand consulting about FinTech and emerging technology. The platform can be used to search for analysis on specific startup companies, emerging technologies and industries. It allows you to assess the impact of innovation on your business and follow the topics, trends and companies that interest you. To try DeNovo for free, or upgrade to DeNovo Premium for deeper strategic analysis and direct access to subject matter experts, please visit https://denovo.pwc.com.