Are we facing the end of financial services as we know it?

29 Apr 2016

PwC Ireland’s fintech leader John Murphy pictured with global financial services leader Nigel Vooght. Photo via Maxwell Photography

By blurring lines and shifting focus, new technology and how we use it is transforming financial services, inside and out.

Last week, as was dissecting and demystifying the fintech sector, PwC Ireland’s fintech leader, John Murphy, told us about the challenges facing Ireland’s ambition to be a global fintech hub. Since then, Murphy and his colleagues have produced a report on how fintech is shaping financial services, focusing on the Irish market.

Globally, PwC quizzed more than 500 respondents from 46 countries for its report, covering all walks of financial services: banking, insurance, asset and wealth management, fund transfers and payments, and fintech companies.

The title, and overarching theme of the study, is Blurred Lines, a visual metaphor of how fintech upstarts and new market activities are redrawing the competitive financial services landscape and traversing what were once clearly defined and segmented sectors.

In brief, the PwC report surmises that Irish financial services organisations are set for a fundamental shift in how they do business.

Putting the customer first

There were more than 50 Irish respondents to the survey and, among them, 45pc believe they will lose up to 20pc of their business to fintech by 2020, while a further 25pc think that it will be even more than 20pc.

The banking sector, in particular, is feeling this pressure and, by global and Irish estimates, consumer banking is the sector seen as most likely to be disrupted by fintech over the next five years, followed by fund transfers and payments.

Fintech’s most powerful weapon? Disintermediation. Just look at how the payments industry has been disrupted by technology-driven processses and digital applications making money transfer increasingly mobile and friction-free.

Technological capabilities have certainly enabled these transformations, but it’s how we use technology – not technology itself – that really drives innovation.

“Don’t make the mistake of thinking that fintech is all about putting apps on mobile phones. It really isn’t,” warned Nigel Vooght, PwC’s global financial services leader. “It’s about using technology to give the customer a better experience and, once you start looking at that, that challenges the whole infrastructure of the financial services sector.”

‘Don’t make the mistake of thinking that fintech is all about putting apps on mobile phones. It really isn’t’

Many would agree that the sector needs a challenge such as this to shake it up after failures in the system resulted in a global economic downturn.

“Since the crisis, the financial institutions’ holy grail is to become customer-centric, whether it be for corporates or for individuals,” said Vooght. “They need to become more customer-centric and actually give the customer what they want, in the time that they want it, in an efficient way. And that’s how you’re going to win in this market.”

Trust in innovation

In the digital age, customer expectations are being driven by tech companies – the Googles and Apples of this world that pride themselves on their optimised user experience. Fintech companies understand this model, offering enhanced accessiblity, convenience and tailored products.

“There’s no doubt about it, the brands of Google, Apple and others are far more trusted by the millennials than the banks and financial institutions, and the bankers will tell you the same thing,” said Vooght.

‘There’s no doubt about it: Google, Apple and others are far more trusted by millennials than the banks and financial institutions’

The core issue boils down to trust. When Google innovates a product, the response is often exclamation – ‘Wow! Fantastic! What a great innovation!’ – whereas banks trying new things are faced with interrogation – ‘What are you doing? Why are you doing that? What are you trying to hide?’

“It’s a different mentality because it’s a bank, and banks feel this. Banks will tell you that they recognise that they have to rebuild trust in society for their bands and reputations, and that’s across the world following the financial crisis – and some bankers think that’s going to be another 10 to 15 years,” said Vooght.

Good UX is more than good UI

Vooght is also keen to emphasise that there is far more to user experience (UX) than a good user interface (UI), which sometimes serves as little more than a fancy veneer at the front end of a service that is still as clunky and inefficient as ever behind the slick graphics. It doesn’t matter if you have fancy screens optimised for mobile devices if the process itself still takes 24 to 36 hours to work through the system.

“[Making] the back office more seamless is actually a vital step in giving a better customer experience,” said Vooght.

This also addresses the challenge of integrating new technology with legacy systems, which banks have become burdened with because, ironically, they were quick to adapt to the early days of computing.

‘Banks were one of the first early adopters of technology. As a result, they’ve got a bigger challenge in changing from today to tomorrow’

“People forget that the banks were probably one of the first early adopters of technology because they had so much data they had to,” said Vooght, reminiscing at his own amazement when a bank first sent him an email.

“As a result, [banks] have got a bigger challenge in changing where they are from today to tomorrow.”

Like a super tank, any large organisation takes a long time to turn, but now these institutions need to adopt what Vooght calls fintech speed – which is about 10 times faster than the speed they’re used to moving at. “The banks will tell you that making decisions about putting in systems can’t take years anymore, it’s got to be done in months or weeks,” he said.

Malcolm Craig, co-author of the PwC Ireland report, said he essentially sees two obstacles for financial institutions to overcome – legacy and customer expectations. “Fundamentally, the financial institutions face two barriers. One: they’re dealing with legacy technology, making rapid change difficult. And two: there’s consumer expectations that things work with the banks, and they won’t accept things not working.”

That is to say, we welcome new tech-savvy services, but not if anything dares go wrong with the organisation we’ve trusted with our finances.

“Ironically, with a fintech start-up and a newer company, things not working the first time is okay,” Craig added.

Ireland’s advantage

Irish respondents to PwC’s survey perceive themselves to be at an advantage in regard to customer-driven thinking, with 65pc claiming themselves as fully or very customer-centric compared to the global average of 58pc.

Vooght credits this to our tight-knit population. “If you go to a London or a Zurich or any other financial centre, the customer base is so vast you cannot possibly know your customers,” he said.

“You’re a relatively small community and you seem to know everybody. When it comes to banks and so on, you know the customers in a much better way than most of the organisations in the rest of the world. The customer-centricity part is almost part of your DNA anyway.”

It may seem strange, then, that PwC’s report reveals that Ireland’s fintech strength is being built up in other areas.

“The niche that it appears Irish fintech companies are moving toward isn’t as focused on the customer as our global counterparts but, more so, focused on operational efficiency and cost reduction,” said Craig, citing companies such as Fenergo (regtech), Fineos (insurance) and Realex (payments) as some prominent, successful examples.

“These [companies] aren’t focused on customer experience, they’re actually focused on efficiency and merging with established financial institutions and helping them work better.”

It’s not that Ireland isn’t producing customer-facing fintech start-ups – Juggle is just one example presented by Craig – just that they are responding to different needs. “It may actually be a throwback to the economic difficulties we’ve had,” Craig offered in explanation. “There is such a big focus on the financial institutions to try and make cost reductions. That’s driving the market to some extent, and the fintech companies are responding.”

For Vooght, it seems we’ve already moved on to the next necessary step in fintech. “The efficiency of serving those customers is your next grail,” he observed. “I would actually say you are ahead of the development of where fintech will go.”

Cultural shifts

In PwC’s data, almost 70pc of Irish companies (compared to 60pc globally) say they are putting fintech at the heart of their strategy, but what does this mean?

Fintech is as much about adopting the tech sector’s current cultural mindset as about incorporating its technologies. As well as shifting thinking to customers first, this means constantly tracking technological developments, aggressively engaging with external partners and integrating digitisation into the corporate DNA.

Globally, and in Ireland, the most widespread form of collaboration with fintech companies is through joint partnerships, which suit those institutions not yet ready to invest fully in fintech by providing an easy and flexible option to partner up and harness new capabilities in a safe test environment. While very few (3pc) Irish companies have motives to acquire fintech companies, 35pc are engaging in joint partnerships.

‘In five to 10 years time, financial services brands will still exist but the business models they have will change completely’

Of course, integration comes with its own challenges. Regulatory uncertainty and IT security are chief roadblocks for these partnerships and 92pc of Irish financial services CEOs see over-regulation as a threat to growth. There’s ambiguity exacerbating the challenge, as sometimes these companies and these technologies have no precedent, being so new, so it’s not entirely clear what rules they are even obliged to follow.

Most financial institutions need to re-learn how to innovate and attract talent with the right mix of technical and commercial skill, which will require a change in mindset to one that supports innovation at all levels. Globally, 54pc of PwC’s survey respondents see differences in management culture as a particular challenge, compared to 38pc in Ireland.

Age of transformation

The message of the PwC study is clear: Whatever the chosen strategy, financial players cannot afford to ignore fintech.

This emerging sector has spawned a surge of new financial services business models, challenging regulators as well as the established market. Yet traditional financial institutions can continue to play a central role in the new landscape by incorporating new technologies into their own architecture.

For Vooght, the challenge boils down to the question of what the financial services sector – the banks, the insurance companies, the asset managers, etc – will look like in the near future.

“That is the real question – what is it going to look like? And the bet is – and you’ll hear this from industry insiders as well as from us – that what you see today will not be the same in five to 10 years time at all. The brands will still exist but the business models they have will change completely.”

Elaine Burke is the host of For Tech’s Sake, a co-production from Silicon Republic and The HeadStuff Podcast Network. She was previously the editor of Silicon Republic.