The world’s largest finance companies are moving to protect their market share by ramping up investment in financial technology, known as fintech.
In May, Italian banking group Intesa Sanpaolo followed other major banks, including Barclays, Santander and Citi, by establishing a new fintech innovation centre in London.
It followed a report from consultants at accountancy group PwC in March which forecast that banks faced losing up to 24 per cent of market share within five years to standalone fintech companies if they did not respond.
High change period
Banks are not alone in their realisation that fintech disruption is beginning to have a very real impact on their business.
The PwC Global FinTech Survey 2016 found that fund transfer and payments firms were likely to see a loss of business of up to 28 per cent, while asset management and wealth management groups could witness a drop of 22 per cent.
The statistics have got firms thinking. State Street Global Exchange was founded in 2013 in direct recognition of how evolving financial technology was likely to impact the wider State Street group and sector more broadly.
James (J.R.) Lowry, head of State Street Global Exchange in Europe, the Middle East and Africa, says the financial services industry is about to see different power brokers emerge.
He says: “We’re unquestionably in the midst of a high-change period, one that has the potential to radically reshape the financial industry in the coming years, with unprecedented levels of new regulation, as well as never-before-seen changing investor demands and market behaviour.
“With this comes a need for more internal efficiencies in order to reduce the inherent costs associated with such change. Against this backdrop, technology has emerged as the single biggest trend influencing the financial industry today.”
For those financial groups that have recognised the benefits of investing in fintech innovation, many have chosen London as their centre of choice. A 2016 HM Treasury report
says the UK fintech sector now contributes some £20 billion to the country’s gross domestic product, employing more than 61,000 people.
Experts say the reason companies have chosen London comes down to three key points – regulation, market opportunity and availability of capital.
Howard Womersley Smith, commercial and technology partner at Taylor Vinters, explains: “Since 2013, when the Financial Services Authority, Office of Fair Trading and Independent Commission on Banking reviewed competition and barriers to entry to becoming a bank, the banking sector – and by association the financial services sector as a whole – has seen a liberalisation.
“Today, the UK government, the Financial Conduct Authority and Prudential Regulation Authority are committed to lowering barriers to entry to the financial services sector in order to increase competition.”
Mr Womersley Smith says London’s position as the world’s financial hub sets it apart as the obvious centre, if not capital, of fintech.
According to Innovate Finance, investment in the fintech sector grew by 35 per cent in 2015 to more than £600 million. Despite this, some financial groups are yet fully to embrace the potential presented by fintech as a whole.
Responding to change
Lee Goggin, co-founder of findaWEALTHMANAGER.com, says he has witnessed some firms being slow to transition to the new market reality. He warns those financial services groups that do not respond to the changing market could see more than a loss of market share.
He says: “If they don’t disrupt and change now, they are at risk of becoming extinct. The traditional firms will look even more different or will be closed because they are no longer competitive.
“To a large degree, fintech is about cutting costs and so this can only be a good thing for the firms that need to reduce overheads to remain competitive.”
While much media attention has been assigned to the commercial risks faced by traditional financial services companies, less has been made of the collaboration between fintech specialists and traditional firms.
Interdealer broking group ICAP is one example of how financial services businesses are radically changing to embrace the new market environment.
Michael McFadgen, managing director of Euclid Opportunities at ICAP, says: “Almost all traditional financial services companies have realised that fintech firms offer new and innovative technologies and solutions, and that therefore to compete with their traditional rivals and to deliver to their various stakeholders, they will need to embrace and adopt these new providers.
“One example is the rise of the corporate accelerator programme run by so many traditional financial players. Yes, these are ways to keep an eye on potentially disruptive emerging businesses, but if you look closely many of the startups selected for these programmes are actually emerging technologies helping incumbents to solve core problems.”
Mr McFadgen says that while market share is one metric to be considered, disruption isn’t necessarily the only way fintech is going to impact the financial services ecosystem of the future.
He concludes: “Traditional players should – and are – exploring innovative ways to leverage emerging technologies and businesses to help deliver new and improved services to their customers. We expect to continue to see traditional players embracing these new technologies and business models through partnerships, acquisitions and other models.”