Q&A: What is FinTech?
How is financial technology (FinTech) disrupting the financial services market for legacy financial institutions?
US financial institutions are finding it harder to secure new sources of revenue. Growing the top line is challenging as consumers grow accustomed to paying little or nothing for products and services. Banks, asset and wealth managers, and insurers are scrambling to find new ways to grow: organically, by introducing new services, through acquisitions, or by developing strategic partnerships.
I’d love that. Is it free? Customers are only willing to pay for services that truly create value for them. Inspired by their experience with other, advertising supported businesses, they’ve come to expect most services for free. They also want interactions to be effortless, personal, and fast.
Plugging into FinTech and InsurTech. FinTech startups really “get” their customers, often spotting needs and wants that previously went unrecognized. And they often reach those customers in fundamentally different ways. They have created new product categories, thanks to a growth in enabling technologies like mobile, cloud, and inexpensive storage. For legacy firms, this represents competition—but it also offers opportunity for new revenue streams resulting from increased innovation, partnerships, and acquisitions.
Drowning in data. The financial services industry collects more data on its customers than pretty much any other industry. But, so far, firms have struggled to extract the full value from that data.
Let’s make a deal. From banking to insurance to asset and wealth management, 2016 had a somewhat lower M&A profile than the previous year. But some financial institutions still made strategic acquisitions to consolidate and to acquire technology.
All eyes on the Fed. Competition from startups and other technology players will continue to restrict margins. Even if interest rates rise, margins may not increase very much if customers look elsewhere for higher returns.
Have you truly gone digital? Based on experiences in other industries, consumers of all ages demand a more seamless, personalized experience from their financial institutions. Digital isn’t just a delivery channel issue. Leading financial institutions will use digital tools to discover unmet needs. To do this, they will commit to strategic investments that let them understand how to meet those needs.
Taking advantage of data. We’ll see leading firms analyzing structured and unstructured data to anticipate what will happen next rather than reacting to what already happened. This changes everything—from fighting fraud to preventing insurance losses to spotting new sources of revenue.
Working, together. The underlying conditions for M&A activity will remain in place in 2017, but we also expect firms to invest in developing alliances, partnerships, and joint ventures. These other business relationships can make it easier for them to address client needs more quickly. Some insurers may look to divest to escape a SIFI designation, and we expect an active private equity environment.
Go where the customers are. Financial institutions should become part of the daily lives of their users. If you’re targeting customers who want to achieve financial fitness, for example, you should provide products that bundle advice with reviews and service. You should also make interactions fun and rewarding.
Learn from the disruptors. FinTech and InsurTech companies succeed because they solve problems at the heart of the customer’s needs. Once they do, they pivot to offer adjacent services. For example, many payments companies have expanded to lending. It’s a natural extension: they already have the data they need to make smart lending decisions. You should observe how disruptors innovate, and then let it shape your own thinking.
Embrace imperfection. In this market, slow and steady loses the race. Learn to tinker and prototype more effectively, and then find ways to share your experiences broadly throughout your organization. To do this well, you should rethink how you approach business models.
Don’t go it alone. You should stay open to new business models and nontraditional relationships. We expect to see a much greater emphasis on new ways to access and share data, as with open banking and application program interfaces (APIs).
“No one knows what the perfect new business models are because they haven’t been fully articulated or proven. To find sustainable revenue, firms will need to learn fast, fail fast, and partner as needed.”
PwC's Marie Carr discusses the search for new revenue sources and innovation in financial institutions. Firms have paths for new revenue available to them that weren't there five or ten years ago. In addition, innovation and approaching business models from a fresh perspective can help in tapping those revenue sources.
PwC's Andrew Nevin discusses three alternative approaches for financial institutions to stay competitive. With changing customer demands and increased competition from new entrants, financial institutions need to think outside of the box on how best to adapt to these difficult times.
Our teams in asset and wealth management, banking and capital markets, and insurance are helping our clients tackle the biggest issues facing the financial services industry. With professionals across tax, assurance, and advisory practices, we can help you find ways to thrive even in a period of uncertainty. Whether you're preparing for regulatory changes, putting FinTech/InsurTech to work, or rethinking your human capital strategy, we work together with you to deliver value to your business.
For more information on how PwC can help in the search for new revenue, reach out to one of our leaders below.