- PwC’s global report reveals that over 20% of traditional financial services market share is at risk to fintechs.
- Funding of fintech startups on a steep increase, totalling US$12.2 billion in 2014.
- Banking and payments sector most exposed to disruption.
The ‘constant penetration’ of technology-driven applications in nearly every aspect of the financial services is a new phenomenon that could threaten around a quarter of the industry, says a global report by PwC.
Released this week, Blurred lines: How FinTech is shaping Financial Services reveals that financial services (FS) incumbents believe that over 20% of their market share could be whipped away by technology-focused startups and innovative new market entrants by 2020.
It’s not just the FS industry that sees serious change on the horizon – investors can sense it, too. The fintech sector is accelerating at a remarkable rate, with global funding of fintech startups in 2014 (at US$12.2 billion) having more than tripled from the previous year. Funding continues to rise and has led to a blurring of lines within the FS ecosystem as outside forces begin to reshape the industry.
A competitive landscape
for financial services
Consumer banking, fund transfer and payments sectors are the most likely to succumb to disruption, says the survey, which canvassed the views of over 500 senior-level management and C-suite across various segments of the financial services. Standing the most to lose from disruption is fund transfer and payments which, within five years, could see its ‘old guard’ succumb 28% of business to fintech players.
Insurance and asset or wealth management is seen as the next sector to be challenged, with up to 22% of the business susceptible. The chart below shows sectors seen by respondents as most likely to be disrupted by 2020.
the customer experience
Powering the disruption of financial services, as seen elsewhere, is the rise of customer expectations. Consumers seek experiences that are quicker, more innovative and convenient. Fintechs, which unlike incumbents tend to operate outside the constraints of heavy legacy systems or specific regulatory frameworks (at least for the time being), are able to swiftly swoop in to produce technology-driven solutions. Traditional, cumbersome financial institutions often cannot act as quickly or have been slower to adopt customer centricity as part of their DNA.
This is reflected in the fact that only 53% of financial institutions consider themselves to be customer focused; for fintech operators, the figure rises to over 80%.
Yet financial technology is driving improvements, with three quarters of respondents saying that fintech will help focus on customer needs by driving new offerings.
banks and fintechs
It isn’t just a better experience that fintechs are helping to deliver, they’re also lowering costs. Australia’s banks are the most profitable in the developed world, meaning that here, it is a space particularly attractive to disruptive new entrants.
Operating costs is a key area in which these efficiencies can be achieved, with the nimble, smaller fintech startups typically using cloud-based platforms for example, meaning less investment for up-front and ongoing infrastructure. Standalone fintech companies can disrupt the business-to-consumer market through disintermediation: cutting out the ‘middle man’ to offer products and services directly to customers. Peer-to-peer lending is an example of this: loans are sought by the public not from banks, but from other people, enabled by digital platforms (such as SocietyOne or RateSetter). Lower operating costs in this industry mean they claim to pass on better lending rates to customers.
Also, traditional FS businesses may see their profit margins threatened by competitors empowered by strategic partnerships with fintech companies. These partnerships can offer incumbents a faster route to improved products or services by providing specialist capabilities (such as data analytics or biometrics) or designing and producing more automated or other innovative solutions.
Financial services companies can themselves partner up with B2B fintech businesses to enable their own efficiencies and improvements. The greatest opportunity is seen in cost-cutting, followed by the creation of differentiated market offerings and improved customer retention. However it’s not all a race to the bottom: 74% of the fund transfer and payments sector said they see fintechs as creating an opportunity for additional revenue.
There’s no doubt that the traditional financial services sector is not only challenged by fintech but is being reshaped by it. PwC estimates that cumulative investment in fintech could exceed $150bn globally in the next three to five years. If incumbents want to retain their quarter or so of market share, they need to act – whether that means to collaborate, innovate, differentiate or more.