A large majority of global banks, insurers and investment managers intend to increase their partnerships with fintech companies over the next three to five years and expect an average return on investment of 20% on their innovation projects.
A new PwC report, “Redrawing the lines: FinTech’s growing influence on Financial Services” that draws on a survey of over 1 300 respondents globally, 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 globally and 88% in Africa, seeing it as a real threat (global: 83% in 2016; Africa in 2016: 95%).
On average, up to 24% of revenue is thought to be at risk.
As a result, a mutual understanding is emerging between the two parties – fintech startups require the access to capital and customers provided by incumbents, and big financial firms are starting to understand how fintech could be the key to finally overcoming legacy technological and customer communication issues.
Manoj Kashyap, global fintech leader at PwC, comments: “Fintech collaboration, and innovation more widely, is not about jumping on the latest bandwagon – it’s about finding the best, most efficient way to carry out your business strategy and ultimately better serve your customers.
“As financial institutions work ever more closely with innovators, consumers will begin to feel the benefits. The costs and frustrations customers often encounter when interacting with their bank, insurer or fund manager will hopefully begin to subside as they feel the benefit of streamlined, efficient businesses producing more tailored, customer centric products.”
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.
Currently, 45% of participants are partnering with fintech companies, an increase from 32% last year. A further 82% have indicated that they are planning to do so in the next three to five years.
In South Africa, more than half of respondents (63%) are presently engaging in partnerships with fintech companies, and a vast majority (96%) are expecting to increase partnerships over the next three to five years.
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.
Start-ups applying artificial intelligence (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.
Blockchain is coming out of the lab too, with more than three quarters (77%) of global financial services companies planning to adopt blockchain in live production systems by 2020.
Funding in blockchain companies increased 79% year-on-year in 2016 to $450-million globally.
Meanwhile, almost a quarter (24%) of global financial institutions (Africa: 23%) say they are now “extremely” or “very” familiar with blockchain technology.
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 US cite funds transfer infrastructure as the most likely business use case, probably explained by the maturity of blockchain investment already undertaken there.
Steve Davies, EMEA fintech leader at PwC, says: “The financial services industry has now fully embraced fintech to help drive change and innovation. Activity ranges from partnering with fintech startups, financing in-house incubators, and deploying new solutions, to testing use cases in areas like blockchain. Sustained focus on innovation is much needed and can only be a good thing for firms and their customers.
“There are few overnight successes and, unsurprisingly, as much perspiration as inspiration. There is a tension between the time needed for new ideas to mature and the expectations of firms seeking to collaborate with fintech startups. Managing expectations around returns is important, particularly for firms facing significant cost pressures. Embracing Fintech is as much about different ways of working and problem solving as it is about deploying new technology.”
Paul Mitchell, fintech leader ay PwC South Africa, says: “Financial institutions need to find the right combination of initiatives that allows them to learn about the impact fintech will have, while incorporating new ways of working and getting innovations to market.”