Fintech and the banks, coming closer together

“The financial services industry will be unrecognizable in five years.” This sweeping statement opens the concluding section of the Global Fintech Report 2017’, published by PwC, which analyzes the future of the sector based on interviews with 1,308 finance executives, from both large banks and fintech.

It is precisely these fintech companies, which combine finance and technology, that are the principal motor of change. Over the past four years, the funds received by these companies have grown at an average annual rate of 41%, to reach an accumulated total of $40 billion.

While they are growing in financial muscle, the fintechs’ role has been changing, say the experts at PwC. They are no longer just startups that want to dethrone the established institutions. Today, they are part of a complex ecosystem in which new alliances and accords are being formed all the time. The fintech companies need capital, but they need clients even more. And the established banks know that the innovative approach and the 100% digital corporate culture are the patrimony of the fintech. The conclusion is clear: it´s better to collaborate and to build bridges.

As a result, 82% of the executives in the traditional financial sector believe that agreements with fintech companies will increase over the next three to five years. In addition, 74% plan to invest in data analysis in the next 12 months, compared to the 34% that will do so in Artificial Intelligence, 32% in cybersecurity and 20% in blockchain.

However, the data change when the study focuses on the companies that are larger in size. The big fintechs are clearly betting on blockchain, while the large, consolidated financial institutions are planning to invest in artificial intelligence.

One of the most striking conclusions of the report is precisely that blockchain has come out of the laboratory to become a technology that is already attracting serious investment. According to PwC’s data, the funds received by blockchain companies during 2016 showed a 79% annual increase, to $450 million. As for the application of blockchain technologies to banking systems, 55% of those surveyed said this will come about next year, while 77% said it will take place no later than 2020.

Regulation: at the center of the agenda

Regulation tends to be regarded as a barrier to innovation, especially in the financial sector. But it can also be a pathway to business.

PwC prefers to see the glass half-full and points to the investment in and the possibilities of “regtech,” companies, the startups that use technology to solve the regulatory problems of the financial sector. It has counted 230 regtech startups and underscores the possibilities offered by the automation of regulatory process and compliance with norms (thanks to artificial intelligence and machine learning) and processes of identification to reduce fraud. The market seems to believe in these capabilities: the regtech companies have an accumulated investment of $1.4 billion, with an average growth rate of 44% over the past four years.

In parallel and, as Jose Manuel Gonzalez-Páramo, BBVA’s chief officer for global economics, regulation and public affairs, wrote in a recent article, the fintechs could in a very short time go from “being too small to be worried about to being too big to fail.” For that reason, regulation is needed that, without strangling innovation, protects the consumer and the stability of the system.

Not all these investments in new technologies or new business sectors will be successful; it´s possible that some bubble may burst so that later, once the fad has passed, it can be reborn on a more solid basis.

The only thing that is clear is that the new generations that are now beginning their economic activity ask their banks for an experience that has more to do with technology than with going to a traditional branch office. The challenge of the banks is to transform themselves, and they cannot do it without taking into account the fintech companies. But this dependence is mutual: the fintechs also need banks.