The impact of technology on financial services has been rapid and significant according to PwC’s 2017 Global Fintech Report – Redrawing the lines: FinTech’s growing influence on Financial Services.

Let’s take a look at where PwC says financial services have been hit the hardest and what’s on the horizon.

Biggest fintech impact

According to research based on data from PwC’s DeNovo platform, funding of FinTech startups has increased at a compound annual growth rate (CAGR) of 41% over the last four years, with over US$40 billion in cumulative investment.

Cutting-edge fintech companies and financial innovation are changing the competitive landscape and redrawing the lines of the Financial Services industry.

What disruption’s ahead?

While mainstream financial institutions are embracing new technology and forging new partnerships, there are new disruptions on the horizon, including artificial intelligence; agile, mobile competitors; and blockchain technology.

Here’s where financial industry leaders think the disruption is coming from in the next five years:

  • Startups (75%): seen as the biggest disruptors, although many are now providing platforms for financial institutions.
  • Social media/Internet platforms (55%): leveraging large client reach and providing new channels for customer service and business models
  • ICT & big tech companies (55%): fast innovators such as Apple, Google, and Amazon who can innovate and move quickly
  • E-retailers (43%): e-commerce and online sellers like Amazon who can use huge databases to deliver products and services quickly and efficiently
  • Financial infrastructure companies (41%): these fintech partners and providers are providing tougher competition by themselves or in new partnerships with existing financial services competitors
  • Traditional financial institutions (28%): most at risk if they do not leverage fintech innovations.

Where is biggest disruption expected?

According to respondents, the biggest disruption and impact will be felt in Latin America (93%), Europe (89%), Asia (88%) and the US (82%).

Industry leaders said the biggest impact underway is in services already being provided to their own customers by fintech competitors: payments (84%), fund transfers (68%), personal finance (60%), personal loans (56%), deposits & savings (49%), insurance (38%) and wealth management (38%).

Customer retention strategies

Financial industry leaders said they are must try to retain customers through a range of responses:

  • payments: ease-of-use, intuitive design, better customer service and 24/7 accessibility
  • banking: ease-of-use, intuitive design, 24/7 accessibility and faster service
  • insurance: ease-of-use, intuitive design, superior customer service and 24/7 accessibility
  • asset & wealth management: ease-of-use, intuitive design, cost management and 24/7 accessibility.

Partnerships part of the solution

Partnering with fintechs overall is up from 32% in 2016 to 45% in 2017.

The most active financial institutions already partnering with fintechs included Germany (70%), Belgium (69%), The Netherlands (65%), Australia & New Zealand (64%), South Africa (63%), and Canada (62%).

Least inactive among countries already partnering with fintechs included South Korea (14%), Turkey (22%), Columbia (25%), Japan and Brazil (30%), Mexico (31%), Denmark (36%) and Hong Kong (37%). 53% in the US had current partnerships with fintechs.

All respondents said their partnerships in the next five years, would grow substantially with the highest including Finland (100%), South Africa (96%), India (95%), Columbia (93%), Japan (91%) and France (90%).

Those who least expected an increase in partnerships in the next five years included Poland (64%), Taiwan (68%), mainland China (68%), Ireland (71%), Brazil (72%), Hungary and Russia (74%).

Biggest challenges?

Not surprisingly, there were big differences between traditional financial services companies and fintechs in their impressions of the biggest challenges in working together.

Among traditional financial services companies, the biggest challenges identified in working with fintechs were IT security (58%), regulatory uncertainty (54%), differences in management & culture (40%), differences in business models (35%), IT compatibility (34%), operational differences (24%), knowledge and skill differences (24%) and financial investments (17%).

Fintechs had somewhat different impressions of the biggest challenges in working with traditional financial service providers, including differences in management and culture (55%), regulatory uncertainty (48%), differences in business models (40%), differences in operations (36%), IT compatibility (34%), differences in knowledge & skills (33%), IT security (28%) and financial investments (16%).

What tech investments are key?

According to PwC, recent advancements in AI have pushed the technology to the top of the list for financial services. Startups that apply AI to Financial Services have been funded more extensively, with an average funding of $1 billion over the past two years.

Biggest areas of technology spending anticipated include data analytics (74%), mobile (51%), artificial intelligence (34%), cybersecurity (32%), robotics and automation (30%), biometrics and ID management (21%) distributed ledger/blockchain (20%), and public cloud infrastructure (14%).

Which technologies are emerging?

Both traditional financial services companies and fintechs identified blockchain, artificial intelligence and biometrics as key emerging technologies. Each had slightly different rankings of importance.

Large fintechs said blockchain (50%), AI (46%) and biometrics (43%).

Large financial institutions, said artificial intelligence was most important (30%), followed by biometrics (20%) and blockchain (19%).

Where are the biggest risks ahead?

PwC identified four key areas of financial services and where the biggest disruption is likely to occur.

“Asset and Wealth Managers (AWMs) are too complacent about disruption to fully take advantage of FinTech developments. They are aware of the disruption in the industry, as 41% believe their customers are already are conducting business with FinTech companies and 60% see wealth management activities at risk of moving to a FinTech company. However, they seem to be following the traditional approach to innovation and focusing on short-term initiatives rather than considering new improvements on the market.”

80% of respondents said banking will have the highest impact with personal loans (64%) and personal finance (50%) most at risk. Banks expect to respond with more partnerships, buying fintech services, product and service improvements and new technologies.

The focus for insurance companies is mostly on exploring partnerships, utilizing data and investments in technology.

In the transactions and payment services, 73% are concerned about losing business to innovators, but on the horizon are more partnerships, product improvements, and technology adoption, including blockchain.

PwC: How to respond to disruption?

PwC concludes its report with six recommendations on areas for financial services companies to focus as they respond to challenges and disruption from fintechs:

  1. evaluate emerging technologies
  2. take a “partnership perspective”
  3. integrate to innovate
  4. create an IT culture to support innovation
  5. focus on the “customers voice” and looking from outside-in
  6. foster a company culture that supports talent and innovation.

You can read PwC’s full report here.