Simon Hardie, Partner at Magna Carta, reviews some findings from the 2018 Fintech Disruptors Report and outlines what to expect from fintech in the year ahead.
In 1997, the notorious British media tycoon Richard Desmond declared that the internet would have little to no effect on the way newspapers were run. Fast forward twenty years, and media titles mainly survive through the internet, with print sales having declined by two-thirds between 2005 and 2015.
Ever since new financial technologies began proliferating ten years ago, the expectation has been that their impact on financial services would be as significant as that of digital media on music and publishing. On the basis of our 2018 Fintech Disruptors’ report, the short reply to that hypothesis is: possibly – but not yet.
Just as new media took ten years to achieve full impact, so we’re only now beginning to see real change in the digital delivery of financial services. And that change is coming not just from fintechs, but from incumbent financial institutions themselves.
If our 2017 Fintech Disruptors Report saw banks waking up to the potential of fintech, then 2018 finds banks in more confident mood, embracing partnership and seeking to innovate under their own brand. 73% of banks surveyed this year are actively seeking partnerships with fintechs, with 44% citing the development of new business models as their main reason for doing so. Meanwhile, a pattern familiar to students of the “dot.com” boom of 1999-2001 is emerging: the best, and most successful, fintech companies are racing to scale up their offerings, with 64% of fintechs seeking to scale up their operations via partnership with an established FI.
These partnerships enable fintechs to scale up at little cost thanks to the incumbent banks’ financial strength. Meanwhile, less successful fintech players are experiencing funding challenges, losing direction and the innovative spark that created them in the first place.
So far, so much like the “dot.com” boom. But where fintech seems to diverge from the e-commerce revolution is in the emergence of a co-dependent relationship between start-ups and incumbent players. If Google, PayPal and Amazon created new markets and turned existing retail models inside out, then there’s significant evidence in this year’s report that banks and fintechs realise they need each other more than anyone anticipated when we began researching this market three years ago. For instance, more banks surveyed this year want to develop their Artificial Intelligence (39%) and data mining (40%) skills than in previous years, and fully 48% of banks want to see mobile service provision embedded in every aspect of their business.
Traditional financial institutions have found product and customer service innovation a huge stumbling block given their risk-averse, conservative cultures and massively complex legacy IT systems. At the same time, some of the most daring and revolutionary fintechs have struggled with regulatory hurdles, access to customer channels and information about their potential customers’ behaviour. More fintechs (65%) than ever before cite “achieving scale” as their greatest challenge; interestingly this is the only challenge to have grown in magnitude for fintechs between 2017 and 2018.
As we write in our report, “We anticipate that the advent of PSD2 will eventually level the playing field between incumbents and digital challengers, but do not expect customers to see the full effect of PSD2 for three to five years.” Clearly, this is a time frame beyond the patience of most venture capital investors and as a result, our prediction for 2018 is for wider and deeper partnerships between fintechs and banks; the rapid scaling-up of fintech solutions that are already successful; more innovation from the banks themselves, and the eventual withering of some start-ups that lack either the capital, ideas or relationships to continue developing.
The 2018 Fintech Disruptors Report includes data from a survey of more than 5,000 financial services professionals, plus in-depth interviews with 20 C-suite executives from the banking, insurance and fintech sectors. To access results from the survey, go to: www.magnacartacomms.com