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FinTech versus financial institutions: The challenge business faces

Fintech can be described as an emerging, modern-day financial services sector – hot on technology. Recently, the term has expanded to include any technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment and even crypto-currencies like bitcoin.

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Cutting edge Fintech companies and financial innovation are changing the competitive landscape, redefining the financial services industry as we know it. In fact, per research based on data from PwC’s DeNovo platform, funding of Fintech start-ups has increased at a compound annual growth rate (CAGR) of 41% in just four years.

This is forcing mainstream financial institutions to change, with many embracing the powerful nature of Fintech and forging partnerships to sharpen operational efficiency to respond to customer demands for more innovative services.

Manoj Kashyap, Global Fintech Leader at PwC US comments:

“Innovation is happening, with emergent technologies being leveraged by start-ups, and if Financial Institutions want to speed up their innovation they need to significantly increase their collaboration with Fintech companies.”

However, change isn’t easy. There are factors that pose challenges to both Fintech companies and incumbents. Differences in management and culture, as well as regulatory uncertainty and legacy technology limitations, are identified as major challenges in working together.

For financial institutions, adapting to an innovation-focused culture will mean they are able to adapt quicker to a changing market. Currently, incumbents labour behind a system of checks and balances that can stifle the innovation process, while Fintech companies are more readily available to adapt to technological advances.

A renewed approach to workplace culture and brand will also play an important role in making change. By altering expectation in strategic areas such as career path, diversity, flexibility and delivering social value, companies will be able to find alternative talent sources that will help drive innovation and make working with Fintech companies less challenging.

When working with financial institutions, Fintech respondents highlighted these challenges:

  • IT security, 28%
  • Regulatory uncertainty, 48%
  • Differences in management and culture, 55%
  • Differences in business models, 40%
  • IT compatibility, 34%
  • Differences in operational processes, 36%
  • Differences in knowledge/skills, 33%
  • Required financial investments, 16%

Differences in management and culture (55%), regulatory uncertainty (48%) and differences in business models (40%) can be clearly identified as the ‘top challenges’ faced – or feared – by Fintech companies, currently.

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In opposition:

When working with Fintech companies, financial institution respondents highlighted these challenges:

  • IT security, 58%
  • Regulatory uncertainty, 54%
  • Differences in management and culture, 40%
  • Differences in business models, 35%
  • IT compatibility, 34%
  • Differences in operational processes, 24%
  • Differences in knowledge/skills, 24%
  • Required financial investments, 17%

In this circumstance, regulatory uncertainty (54%) and differences in management and culture (40%) remained key issues – but it is IT security which brings the highest concern, at an extremely high 58%.


The Importance of Technology

According to PwC, recent advancements in Artificial Intelligence (AI) has pushed technology to the top of the list for financial services and start-ups that apply the use of A.I. have been known to receive more extensive funding.

Accordingly, Fintech companies are driving market changes by focusing on emergent technologies that will provide a renewed experience for their customers. As incumbents adapt to the market and begin to concentrate on these technologies, they will be able to move closer to Fintech.

When asked, what are the most relevant technologies for your business that you plan to invest in within the next 12 months, financial institution respondents answered:

  • Data Analytics, 74%
  • Mobile, 51%
  • A.I., 34%
  • Cyber-security, 32%
  • Robotics process automation, 30%
  • Biometrics and identity management, 21%
  • Distributed ledger technologies (e.g. “blockchain”), 20%
  • Public cloud infrastructure, 14%

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Investment in enabling technologies will help to narrow the gap

In following the trends that Fintech companies are setting, financial institutions will gain valuable insight and the ability to compete. Currently, focus lies on updating their legacy systems with a strong hold on data analytics and mobile technology.

Indeed, while most incumbents are struggling to consolidate and manage data and to offer digital customer-services experiences, FinTech companies are putting their spotlight on emergent technologies – such as blockchain, A.I. and biometrics and identity management.

Furthermore, a percentage of large companies identified these emerging technologies as the most relevant to invest in within the next 12 months

  1. Blockchain
    FinTech – 50%
    Financial Institutions – 19%
  2. Artificial Intelligence
    FinTech – 46%
    Financial Institutions – 30%
  3. Biometrics and Identity Management
    FinTech – 43%
    Financial Institutions – 20%

Feature image credit: rawpixel.com/Shutterstock 

Turner Little and its affiliates do not provide tax, legal or accounting advice. Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.