FinTech s Long-Term Impact on the Financial Industry June 5, 2017
Equity Funding or Sale Price Fintech has existed for a long time, but has recently risen in popularity 1 The term fintech was coined in 1993 and the first modern fintech, Paypal, was established in 1998 Between 1995 and 2003, 450 fintechs offering new digital currencies, wallets, networks, etc. challenged FIs fewer than five of these fintechs survive as standalone entities today McKinsey estimates that there could be as much as 12,000 fintech companies globally only approximately 89 of those are in Canada $1B $500 MM $100MM $1MM 1990s 2000-2005 2006-2010 2011-Present
2 Fintechs focus on customer centricity is fueling disruption As clients are becoming accustomed to the digital experience offered by companies such as Google, Amazon, Facebook and Apple, they expect the same level of customer experience from their financial services providers FinTechs are riding the waves of disruption with solutions that can better address customer needs by offering enhanced accessibility, convenience and tailored products 75% Meet changing needs of customers with new offerings 51% Leverage existing data and analytics 42% Enhance interactions and build trusted relationships 42% Enhance business with sophisticated operational capabilities Areas that FIs believe would see the most impact to their business from fintechs Source: PwC Global FinTech Survey 2016
Lending and Payments have been at the forefront of disruption and will likely continue 3 The three top sectors most likely to be disrupted by fintechs includes: retail banking, fund transfer and payments, and investment and wealth management Fintechs have expanded beyond their initial focus of payments and lending into almost all areas of the financial market Source: PwC Global Fintech Report, March 2016 The Financial Brand *By 2020 Fintechs have traditionally focused on lending and payments so it is not surprising that this sector would have the largest risk for market share loss Banks are feeling pressure from fintechs from many angles, especially threats on their margins, market share, information security/privacy, and client churn
Fintechs are disrupting the industry but FIs are increasingly viewing them as opportunities 4 By partnering with FinTechs, incumbents can strengthen their competitive position and bring solutions or products into the market more quickly. Moreover, this is an effective way for both incumbents and FinTech companies to identify challenges and opportunities as well as to gain a deeper understanding of how they complement one another Joint partnership is an easy and flexible way to get involved with a fintech and harness its capabilities within a safe test environment. Do not know Other We acquire Fintech companies We launch our own Fintech subsidiaries We set up venture funds to fund Fintechs We rebrand purchased Fintech services We establish start-up programs to incubate Fintechs We buy and sell to Fintechs We do not deal with Fintechs We engage in joint partnerships with Fintechs Different ways FIs currently deal with Fintechs
B2B FinTechs create real opportunities for incumbents to improve their traditional offerings 5 Partnerships with FinTech companies could increase the efficiency of incumbent businesses; incumbents could simplify and rationalize their core processes, services and products, and consequently reduce inefficiencies in their operations Incumbents partnering with FinTech companies could deliver a differentiated offering, improve customer retention and bring additional revenues Cost reduction Differentiation Improved retention of customers Additional Revenues Opportunities of partnering with fintechs
Both Financial Institutions (FIs) and fintechs can benefit from collaboration through partnerships 6 The fintech ecosystem has grown considerably, and banks have a great opportunity to improve customer experience, increase revenues, and reduce costs through partnerships with fintechs Fintechs offer: Technology Customer experience Agility 1969 1 st Cdn. bank ABM CIBC has a history of embracing innovation and a strong position in the Canadian financial services industry 1969 1 st o adapt PCs 1996 online banking 2011 1 st mobile brokerage app 2014 1 st edeposit Source: Business Insider FIs offer: Data Book of business Trust & reputation Brand 1970 1 st flying branch 1992 1 st phone banking 2010 1 st mobile banking app 2012 1 st mobile payment app Leveraging what is already built into our culture means: CIBC is in the best position to win against our competitors 2015 1 st Apple watch app We must continue to push to maintain the lead we already have High cost of customer acquisition and lack of trust in the marketplace make it difficult for Canadian fintechs to expand without collaborating with banks
Successful collaboration between FIs and startups can result in co-creation of products and services that deliver compelling value for clients 7 Five recommendations for Financial Institutions Five recommendations for Startups 1 2 3 4 5 Make innovation part of the organization s DNA Maintain clear focus of innovation across all LOBs Make clear choices and investments in radical projects that may provide ROI in the long-run but whose success is hard to estimate Foster a culture of innovation through sustained employee engagement Establish connective tissue to drive execution Develop an internal network of individuals who have a deep understanding of enterprise opportunities & challenges and the ability to integrate startup solutions with current offerings Design an engagement model for sensing and evaluating startups Develop an engagement model that helps efficiently and effectively analyze, identify, and collaborate with startups Establish unique processes and procurement cycles Create more efficient procurement cycles that demonstrate agility and accelerate assessments of startups Setup experiments and earmark budget for pilots Develop a shortest path for experiencing the minimal viable product before potential solution is evaluated 1 2 3 4 5 Get the basic pitch right Present a clear and compelling value proposition Articulate the offering and potential benefits to FIs Clarify your contribution to the partnership The startup solution must be serious enough for the FI to embark on the project Make sure there is a business rationale Assess the partnership model, preparation time and likelihood of success to realize the mutually intended outcome Be flexible to co-development of offerings Demonstrate open-mindedness to jointly design, develop, pilot, and launch solutions by working closely with FIs Be cognizant of your brand and reputation Make every effort to build and protect your brand as FIs prefer trusted partners for collaboration
While FIs may be controlling the banking value chain today, they may be better-off developing a digital ecosystem that provides a trustworthy platform experience for clients in this increasingly digital era 8 Key insights 1. Client centric innovation and market pressure from startups are resulting in creation of an open marketplace/ecosystem based on plug-and-play structures of interoperability 2. Open API integration and Bank-as-a-Service (BaaS) platform are likely to be the future state of FIs in an effort to consolidate their long term standing 3. As trusted partners and custodians of client data, FIs are well positioned to move into an ecosystem model by creating platforms and owning them end-to-end 4. This architecture will additionally offer tolerance for integration with prospective wave of fintech innovation driven by Internet of Value, or ValueWeb Example of an ecosystem based banking business model Online bank with strong focus on social connectivity with its clients Recognizes the value in building upon decentralized open-source methods (like Ripple payment protocol) Offers APIs for 3 rd party integration (Fidor TecS) Involved in crowdfunding via 3 rd party platforms Provides social trading services in partnership with Brokertrain, Ayondo and ShareWise Source: http://thefinanser.com/2016/10/want-convince-bank-change-read-blog.html/
API based platforms are likely to revolutionize banking through a one-stop digital marketplace that efficiently and effectively addresses financial needs of clients 9 P2P Payments Robo-advisory P2P lending Digital currency API based platform for banking services Personal financial management FIs can offer their own competing solutions that are either developed in-house, created through partnerships (white label, JV, affiliate, etc.) or acquired
Regulations have been the biggest challenge for fintechs but regulators around the world are now paving the way for fintech innovation 10 Fintech companies looking to offer bank-like products or services across state lines have been obligated to apply for multiple state licenses, a timeconsuming and complex process. This could change with a recent announcement by the Office of Comptroller of the Currency (OCC) that grants national banking charters UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have moved towards streamlining requirements and lowering initial minimum capital and liquidity requirements for banking licenses in recent years. The policy changes, which are not limited to fintech applicants, have nonetheless encouraged a number of digital banks, peer-to-peer lenders and other fintechs to apply for banking licenses to serve the UK market PSD2 (Payment Services Directive 2) will introduce new rights for fintechs and third party providers to access bank accounts, the arrival of third party access to accounts, the use of APIs to connect merchant and bank directly, and the ability to consolidate account information in one portal, which will undoubtedly disrupt payment services in Europe. In October 2016, the OSC started OSC LaunchPad to provide compliance advice and other support to fintech startups. In January 2017, the OSC announced the formation of the Fintech Advisory Committee, which will advise the regulator on fintech-related developments as well as regulatory challenges faced by businesses in this sector