What will the technology landscape of finance look like in five years? That’s a question explored by PwC’s Financial services technology 2020 and beyond: Embracing disruption, which examines an industry that’s being disrupted on multiple fronts.

One of the report’s US-based authors, John Garvey, Global Financial Services Advisory Leader, speaks to Digital Pulse about where he sees the digital path forward for the banking sector.

Regarding fintech’s rise, it seems like banks and other financial institutions are presented with three options: acquire them, partner with them or draw inspiration from them and compete with an in-house team. From a global perspective, what have you seen? 

There have been a handful of acquisitions but I think the prevailing view is that an acquisition risks changing the most attractive aspects of a fintech startup: a more free, entrepreneurial and innovative environment.

The other thing to consider is that the market valuations for some of these companies are currently quite high, particularly when compared to the banks and insurance companies themselves. So these institutions are wary about paying what they need to pay.

With regard to in-house teams replicating what fintechs are doing, I don’t see that as a real trend. Some banks in America have opened innovation centres then bought and integrated very small mobility companies, but the results have been mixed.

I think partnering is the emerging model, with fintech startups mainly acting as vendors or suppliers. One example is Medallia, which develops and sells customer experience software. Another is Tradle, which provides customer identification services using blockchain technology.

There’s also another type of partnering we are also seeing: closer strategic relationships or joint ventures. For instance, last year Santander Bank announced a joint venture with mobile payments vendor Monitise.

What challenges do fintech companies face in this new partnership paradigm?

It still remains to be seen if these initial collaborations in a supplier or vendor relationship are going to work. If they do, will fintech companies then be able to make their platform offerings ‘multi-tenant’, with more than one bank or insurance company using it?

Or, alternatively, will they implement the more-traditional software-as-a-service model, distributing individual copies of their product to customers? I think the jury is still out on that. We’ll know in the next few years.

Do you think banks should release their own public APIs (application program interfaces) and encourage third party developers to write apps with them?

This is a symptom of a bigger question that we’ve had a lot of discussion on, both with clients and internally, which is whether banks are going to embrace an open architecture model relative to their products and services. To what extent will they go open – especially because nobody goes 100% open? Will they focus on a kind of closed-loop environment instead?

My sense is that you should have APIs but, frankly, you should choose your partners quite carefully. Having said that, if you were looking for some kind of co-development or co-creation opportunity with a developer community, then obviously you have to publish your APIs more openly so people can build things.

It’s a tricky balance. Ultimately, the openness of your architecture will be a crucial part of deciding how you want your platform to be used.

As banks go increasingly digital, what will happen to their legacy systems? What is their value in the medium-to-long term?

People have been trying to crack this legacy system issue – the core banking legacy system – for 25 years. The question is: will there come a tipping point or will it mainly be confined to very slow renovations?

I think it’s mostly the latter. Digital layers are being added, but they’re being done bit-by-bit and layered on top of some of the older pieces of infrastructure. It’s hard for me to see that change in any significant way. Eventually banking systems will get entirely renovated, but it will be gradual.

These renovations tend to start with the exterior and become increasingly internal. If you imagine a legacy system as an old apartment building, what usually happens is the façade of the building is redone to make it look nice from the outside – perhaps with new windows or a new deck.

Then, more internal changes occur: a new bathroom, new kitchen appliances, stainless steel furnishings, and so on. But the stuff that that remains untouched, and is harder to change, is structural: electricity, heating, the foundation, etc.

It’s at this point where the banks start to say: ‘OK, in what order will we do this? Are we going to change the wiring all at once, or are we going to go floor-by-floor? Should we replace the old-but-still-functional boiler with a radiant heating system? Can we do it so the residents can still live in it while renovations are underway?’

That’s the kind of stuff that I think the banks are figuring out, and they’re mostly doing it incrementally. It’s a tough business. Banks are dealing with millions of transactions a day, and that’s what makes it so difficult to renovate the infrastructure. To use another analogy, it’s like changing the engine of a race car when it’s going 250km/h around the track.

Are you seeing any global digital or technology trends that you think Australian financial services leaders should be aware of?

This market is pretty much up to speed on the rest of the world in terms of robotics, automation, the cloud, and core banking services.

The one area that I think perhaps there’s less focus is around industry utilities: banks co-operating, pooling resources, and creating shared infrastructures in a number of service areas. A lot more of this kind of discussion is happening in other parts of the world. That might be a trend, and it’s the only one that really sticks out.

To read more about the future of Australia’s financial services sector, visit PwC’s Future of Financial Services 2020 website.