March 16, 2016 by Canadian Underwriter
More than eight of 10 surveyed financial services firms, including banking and insurance, report believing part of their business is at risk of being lost to standalone FinTech companies, suggests a report released Tuesday by PricewaterhouseCoopers (PwC).
Based on a survey of 544 respondents across 46 countries – including CEOs, heads of innovation, chief information officers and top management involved in digital and technological transformation across the financial services (FS) industry – 23% say their business could be at risk due to further development of FinTech, PwC notes in a statement Tuesday.
In all, 83% of respondents from traditional FS firms and 95% from banks report that part of their business is at risk of being lost to standalone FinTech companies, PwC notes in releasing Blurred Lines: How FinTech is shaping Financial Services, which assesses the rise of new technologies in the FS sector and their impact on market players.
The report defines FinTech as “a dynamic segment at the intersection of the financial services and technology sectors where technology-focused start-ups and new market entrants innovate the products and services currently provided by the traditional financial services industry.”
“FinTech is changing the FS industry from the outside,” Steve Davies, EMEA FinTech leader for PwC, comments in the company statement. PwC estimates that within the next three to five years, cumulative investment in FinTech globally could well exceed $150 billion and financial institutions.
“Tech companies are a stepping over one another for a chance to get into the game. As the lines between traditional finance, technology firms and telecom companies are blurring, many innovative solutions are emerging and there is clearly no straightforward solution to navigate this FinTech world,” Davies goes on to say.
FinTech companies are currently bullish, PwC reports, with these firms saying they anticipate they could capture 33% of incumbents’ business.
Insurance respondents feel the heat from FinTechs, reporting they could lose about 21% of their market share to FinTechs by 2020. But this is less than respondents from the fund transfer & payments industry who note they could lose as much as 28%, banker respondents who estimate 24%, and asset management & wealth management companies who report approximately 22%.
“Although a high level of disruption triggered by FinTech is already beginning to reshape the nature of lending and payment practices, a second wave of disruption is making inroads in the asset management and insurance sectors,” the report states. “When asked which part of the FS sector is the most likely to be disrupted by FinTech over the next five years, 74% of insurance companies identified their own industry, while only 26% of players from other sectors agreed; 51% of asset managers said their industry will be disrupted, while only 31% of other players agreed,” survey findings show.
“The pace of change in the global insurance industry is accelerating more quickly than could have been envisaged. The industry is at a pivotal juncture as it grapples with changing customer behaviour, new technologies and new distribution and business models,” the report states.
The survey shows pressure on profit margins was the most cited FinTech-related threat, noted by 67% of polled FS companies, followed by loss of market share, cited by 59% of respondents.
“One of the key ways in which FinTechs support the margin pressure point through innovation is step function improvements in operating costs,” PwC reports. “For instance, the movement to cloud-based platforms not only decreases up-front costs, but also reduces ongoing infrastructure costs.”
PwC contends that the distributed ledger technology blockchain – which ranks low on the agendas of FS participants – “could result in a radically different competitive future in the FS industry, where current profit pools are disrupted and redistributed towards the owners of new, highly efficient blockchain platforms,” the company statement emphasizes. “Not only could there be huge cost savings, but also large gains in transparency,” it points out.
Still, 57% of respondents say they are unsure or unlikely to respond to this trend.
“Blockchain and disruptive ledger technologies offer a once-in-a-lifetime opportunity for financial services companies to transform the way they do business,” argues Haskell Garfinkell, PwC’s U.S. FinTech co-leader. “In our view, the lack of understanding of blockchain technology and its potential for disruption poses significant risks to existing business models and the firms that do not take the time to understand the impact will underestimate the opportunities and threats that blockchain can provide,” Haskell says.
The report notes that as clients are becoming accustomed to the digital experience offered by certain companies, they expect the same level of customer experience from their financial services providers. “FinTech is riding the waves of disruption with solutions that can better address customer needs by offering enhanced accessibility, convenience and tailored products. In this context, the pursuit of customer centricity has become a main priority and it will help to meet the needs of digital native clientele,” it states.
“Millennials seem to be bringing a higher degree of customer centricity to the entire financial system, a shift that is being crystallized in the DNA of FinTech companies.
While 53% of financial institutions believe that they are fully customer-centric, this share exceeds 80% for FinTech respondents,” the report adds.
As it stands, PwC reports that the most widespread form of collaboration with FinTech companies is joint partnership (32%), indicative that “FS firms are not ready to go all in and invest fully in FinTech.”
Challenges respondents say they face in dealing with FinTech companies include IT security, cited by 53%; regulatory uncertainty, noted by 49%; and differences in business models, reported by 40%.
“FinTech is shifting the paradigm of traditional intermediary roles by making them obsolete. While FS organizations have acted as intermediaries in the financial system by providing an invaluable service to clients, their functions are being usurped by new technology-driven business models,” comments Manoj Kashyap, PwC Global Financial Services’ FinTech leader. “Our survey has shown that a non-negligible 25% of firms do not deal with FinTech companies at all. With the pace of change now occurring at increasingly faster intervals, no FS business can rest on its laurels,” Kashyap adds.
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The survey shows self-directed services are the most important trend and the one to which the market is by far most likely to respond. “As is the case in other industry segments, insurance companies are investing in the design and implementation of more self-directed services for both customer acquisition and customer servicing. This allows companies to improve their operational efficiency while enabling online/ mobile channels demanded by emerging segments such as Millennials,” the report states.
“New digital technologies are in the process of reshaping the value proposition of existing financial products and services,” the report states. “While we should not underestimate the capacity of incumbents to assimilate innovative ideas, the disruption of the financial sector is clearly underway. And consumer banking and payments, already on the disruption radar, will be the most exposed in the near future, followed by insurance and asset management,” it points out.
“FIs should make the most of their position of trust with customers, brand recognition, access to data and knowledge of the regulatory environment to compete. FS players might not recognize the financial industry in the future, but they will be in the centre of it,” the report concludes.
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