Traditional finance firms, including many blue-chip banks, fear that fintech players could capture up to a quarter of their business by the end of 2020.
They are also concerned about being left behind in the race to use blockchain-based, distributed-ledger software as the foundation of platforms for providing customers and borrowers with more effective services.
In new report Blurred lines: How FinTech is shaping Financial Services, Big Four auditor PwC portrays the emerging crop of agile and nimble financial technology firms as a force that is changing the industry from the outside in and, as such, can no longer be ignored.
One of the most significant trends that the report explores is the natural facility that fintech organisations have for being more customer-centric than incumbents, because they lend themselves so readily to disintermediation – ie, eliminating stages between starting and completing transactions, and shedding layers of human contact.
In a real way, the report suggests fintech services are actually merging with the technologies that support them, with the relatively small size of the new firms enabling them to make rapid decisions and pursue fresh customer habits almost as soon as they develop.
PwC polled 544 CEOs, CIOs and heads of innovation at traditional finance firms all over the world. “In keeping with changes already under way,” says the report, “the majority of our survey participants see consumer banking and fund transfer and payments as the sectors most likely to be disrupted over the next five years.”
It adds: “In consumer and commercial lending, for example, the emergence of online platforms allows individuals and businesses to lend and borrow between each other. Lending innovation also manifests itself in: alternative credit models; use of non-traditional data sources and powerful data analytics to price risks; rapid customer-centric lending processes; and lower operating costs.”
The report indicates that established firms should work in strategic partnerships and other joint ventures with fintech firms to learn more about how they operate. PwC fintech leader for the EMEA region Steve Davies said: “Given how fast technology is changing and lines are blurring, no business can afford to rest on its laurels. As competition hots up, the result will be a reduction in margins and a loss of market share for traditional financial institutions.
“Those who do not act now are at risk of falling behind as fintech changes the industry from the outside. Incumbents cannot afford to ignore this trend. Nevertheless, our survey shows that 25% of firms currently have no interaction at all with fintech companies.”
For PwC, that is going to have to change very quickly if big-brand finance firms are to stay vital and relevant – particularly as there are now 700 different companies vying for market supremacy in the field of blockchain software.
Although blockchain first came to public attention as the DNA of prominent cryptocurrency Bitcoin, innovators in the finance industry have been trying to adapt the technology into various distributed-ledger platforms, whereby transactions are recorded instantly and are visible to all networked participants in real time.
As we reported in October, 22 major banks have signed up to the R3 Consortium’s plan to develop a distributed-ledger system for major financial institutions. However, the prescient strategy of those organisations is by no means reflected in the industry as a whole.
PwC’s survey found that, while many traditional finance firms recognise the importance of blockchain, 57% are not sure how they will respond to the trend. More than a quarter (27%) of asset managers are ‘not at all’ familiar with blockchain, and that figure rises to 61% among insurance companies.
Davies added: “Blockchain and disruptive ledger technologies offer a once-in-a-lifetime opportunity for financial services companies to transform the way they do business. The lack of understanding of blockchain technology and its potential for disruption poses significant risks.
“The firms that do not take the time to understand the impact are underestimating the opportunities and threats that blockchain can provide.”