Cumulative investment in financial technology (FinTech) globally could exceed $150 billion within the next three to five years, according to a survey by auditing giant Pricewater House Corper (PWC).
The survey said financial institutions and technology companies are stepping over one another for a chance to get into the game titled.
FinTech, according to experts, refers to any innovation on how people transact business. It applies to the segment of the technology startup scene that is disrupting sectors such as mobile payments, money transfers, loans, fundraising, and even asset management.
The report, “Blurred Lines: How FinTech is shaping Financial Services”, said traditional Financial Services (FS) firms fear almost a quarter of their business is at risk from FinTechs. It said FinTech companies are more bullish, believing they could capture a third of incumbents’ business.
The report, made available to The Nation, added that Nigeria is just as threatened by FinTech companies as their global counterparts. It, however, said it expects Nigeria to leap frog and adopt the rapidly changing technologies as they emerge, driven primarily by consumers’ demands.
The report, which featured the responses of 544 CEOs, Heads of Innovation, CIOs and top management involved in digital and technological transformation across the FS industry in 46 countries, said incumbents believe 23 per cent of their business could be at risk due to further development of FinTech.
Results from the PwC survey, which assessed the rise of new technologies in the FS sector and their impact on market players, also revealed that 83 per cent of respondents from traditional FS firms believe part of their business is at risk of being lost to standalone FinTech companies, reaching a staggering 95 per cent in the case of banks.
The survey showed the banking and payments industries are feeling the most pressure from FinTech companies. Respondents from the fund transfer & payments industry anticipate that in the next five years, they could lose up to 28 per cent of their market share to them, while bankers estimate they are likely to lose 24 per cent. This compares to around 22 per cent in the case of asset management & wealth management and 21 per cent in insurance.
Two-thirds (67 per cent) of FS companies ranked pressure on profit margins as the top FinTech-related threat, followed by loss of market share (59 per cent). One of the key ways in which FinTechs support the margin pressure point through innovation is step function improvements in operating costs. For instance, the movement to cloud-based platforms not only decreases up-front costs, but also reduces ongoing infrastructure costs.
Blockchain, a distributed ledger technology, represents the next evolutionary jump in business process optimisation technology. According to PwC, it 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. Not only could there be huge cost savings but also large gains in transparency. Yet it ranks low on the agendas of participants.
While the majority (56 per cent) recognise its importance, 57 per cent say they are unsure or unlikely to respond to this trend. ”When faced with disruptive technologies, the world’s leading companies succeed by rapidly weaving them into their DNA, as part of their ‘business as usual’ process,” says Partner and Financial Services Advisory leader at PwC Nigeria, Dr. Andrew S Nevin.
Nevin added: “Blockchain and disruptive ledger technologies offer a once-in-a-lifetime opportunity for FS companies to transform the way they do business. 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.”
To put this into perspective, PwC’s Global Blockchain team has identified over 700 companies entering this space, 150 of whom it says are ‘ones to watch’ and 25 of which it expects will likely emerge as leaders.
The PwC’s survey showed the most widespread form of collaboration with FinTech companies is joint partnership (32 per cent), which PwC said is indicative FS firms are not ready to go all in and invest fully in FinTech.
Asked what challenges they face in dealing with FinTech companies, 53 per cent of incumbents cited IT security, regulatory uncertainty (49 per cent) and differences in business models (40 per cent).
In the case of FinTech companies, differences in management and culture (54 per cent), operational processes (47 per cent) and regulatory uncertainty (43 per cent) were deemed the top three challenges when dealing with traditional FS firms.
On the survey, EMEA FinTech Leader at PwC, Mr. Steve Davies, said: “FinTech is changing the FS industry from the outside. PwC estimates within the next three to five years, cumulative investment in FinTech globally could well exceed $150b.
As the lines between traditional finance, technology firms and telecom companies are blurring, many innovative solutions are emerging and there is clearly no straight forward solution to navigate this FinTech world.”
For PwC Global Financial Services FinTech Leader, Mr. Manoj Kashyap, “FinTech is shifting the paradigm of traditional intermediary roles by making them obsolete. While FS organisations 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.
“Given how fast technology is developing, incumbents cannot afford to ignore FinTech. Nevertheless, our survey has shown that a non-negligible 25 per cent 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 oars.”
Nevin concludes: “Nigeria is just as threatened by FinTech companies as their global counterparts. We expect Nigeria to leap frog and adopt the rapidly changing technologies as they emerge, driven primarily by consumers’ demands.”