A new study reveals that a majority (83%) of respondents from traditional financial institutions believe part of their business could be lost to standalone fintech companies. The figure rises to 95% for banks.
While incumbents fear that a quarter of their business could be at risk, the fintech companies are more optimistic and believe they could take a third of incumbents’ business.
The report, ‘Blurred Lines: How FinTech is Shaping Financial Services’, comes after the Hong Kong Government’s announcement in the recent budget that it intends to offer support to fintech start-ups and to financial institutions.
“Fintech has the potential to deliver a unique customer experience – and that is one of the main reasons why FIs see it as a game changer,” says Matthew Phillips, Financial Services leader for PwC China and Hong Kong.
“In many respects China fintech businesses – from large tech giants to disruptive start-ups – are leading the way. They have demonstrated that by applying deep technological capabilities and a relentless focus on addressing customer pain-points, they can access un-serviced and under-serviced segments in a cost effective and convenient way. This is something that traditional players struggle with.”
This is causing financial institutions to disrupt themselves, rather than waiting for technology to do it to them. Some institutions are choosing to partner with technology companies to digitize and transform conventional models. This has its challenges, both technological and cultural, and is forcing some to create entirely new businesses and brands alongside their legacy businesses.
However, the report also found that many traditional FIs are hesitant in the face of Blockchain, or ‘distributed ledger’, technology. While there is widespread appreciation of how transformative this technology will be, 57% of respondents are uncertain as to what their next steps should be.
“Blockchain represents a truly transformative opportunity for traditional FIs to restructure their cost base, enter into new business models and maintain relevance for customers who have increasing service expectations of speed and security,” says James Quinnild, Financial Services Consulting Leader for Asia-Pacific, PwC.
“In our view, it’s clear certain traditional sectors like payments and consumer banking understand the risk of disruption to their businesses. However, real disruption and value creation will happen when technologies like Blockchain enable new ecosystems of products and services and facilitate new markets for the exchange of assets and transfer of value – cutting across businesses as we see them today.”
While the report argues that the distinction between traditional FIs and fintech businesses will become increasingly blurred, it also identifies key differences. When players from both sides of the divide are asked to cite the main challenges they face when working together, differences in both culture and infrastructure are raised.
For traditional FIs, IT security and regulatory issues are the main concerns when working with fintech companies. Meanwhile, differences in management style and corporate culture represent the biggest hurdle from fintech companies’ point of view. This may yet prove the undoing of the fledgling partnerships we are seeing.
“Given how fast technology is developing, and the competitive and cost advantages it can create, incumbents cannot afford to ignore fintech,” says Phillips. “Nevertheless, our report shows that a full quarter of firms do not deal with fintech companies at all. With the pace of change accelerating, no financial services business can rest on its laurels.”
In January 2016 PwC entered a strategic partnership with Blockstream, which provides access to Blockchain technologies for companies around the world. In February it formed an alliance with Digital Asset Holdings – a firm offering Blockchain services to financial institutions.
PwC has also launched DeNovo - a dynamic strategy consulting platform including content based on the evaluation of over 1,000 Fintech start-ups globally.
“These partnerships and other substantial investments we have made in fintech disruption more broadly, and Blockchain know-how specifically, will be transformative for PwC. We are aggressively disrupting the delivery of our own services for our clients, because it’s critical for us to be a leading advisor at a time of unprecedented change,” said Quinnild.