I received a really interesting report from the law firm DLA Piper last week. The report is focused upon how blockchain is changing the financial services markets around the world, with the aim of establishing the position of major financial institutions with regards to cryptocurrencies and the use of blockchain in their daily operations.
The report picks up on some key highlights and surprising findings, such as:
- 31% of Financial Services firms believe central banks will hold cryptocurrencies on their balance sheet in the next five years;
- 18% expect central banks to establish their own cryptocurrency; and
- 17% of asset managers have or are considering a strategy to invest in cryptocurrencies.
Further findings include:
- 69% of retail and investment banks feel they are being impacted by disruption
- 72% of the firms surveyed have changed their customer journey in the last two years
- 33% of firms have engaged with FinTech firms and 55% intend to so within the next two years
- 74% of firms cite regulation and compliance as a factor in restricting greater adoption of technology and new business models
- 31% of participants expect central banks to add Cryptos to their balance sheets in the next five years
- 82% of firms are worried about cyber security
And here’s the executive summary:
This Digital Transformation in Financial Services paper examines five key themes transforming the financial services (FS) marketplace:
- the evolution of disruption;
- collaboration and investment;
- the shifting landscape of regulation and technology;
- payments and cryptocurrencies; and
- cybersecurity and monetizing data.
It is based on a comprehensive global survey and in-depth interviews with organizations across the FS landscape, including representation from major retail banks, investment banks, FinTechs, venture capitalists, asset managers, insurance companies, fund managers, other financial institutions and regulators, supported by analysis and insight from DLA Piper’s global Financial Services sector team and secondary research sources. The report highlights the key legal, regulatory and commercial challenges presented by digital transformation in the FS sector, and the opportunities on offer.
1. The evolution of disruption:
The global emergence of FinTech continues to disrupt the traditional international FS landscape. Increasingly, banks and financial institutions are rapidly changing under pressure to innovate: 36 percent of surveyed retail and investment banks now consider themselves to be disruptive to a significant extent, with 69 percent acknowledging that they are impacted by disruption. In contrast, 70 percent of surveyed FinTech companies consider themselves to be significantly disruptive, highlighting the positive impact of the FinTech community as a driving force of change within the sector. Efforts to enhance the customer experience are a major factor in the continuous jockeying for position between and across banks/financial institutions and FinTechs, with 72 percent of participants having evaluated and changed their customer journeys in the past two years. At the heart of these initiatives are global efforts to embrace open banking initiatives, a focus on real-time engagement with customers, and consistent service management across differentiated devices – all driven through digitalization. This section further outlines how, in the coming years, banks, financial institutions and FinTechs will continue to focus on a broad range of areas underpinning new forms of value creation.
2. Collaboration and investment:
The relationship between banks, financial institutions and the FinTech community remains complex, with some entrepreneurs seeking to collaborate, and others to disintermediate established financial institutions and banking practices. Thirty percent of surveyed banks and FS companies say they have been engaged or very engaged with FinTechs within the last two years, with 55 percent planning to be in the next two years. The survey shows that the motivations for engaging with FinTechs are complex and diverse. Reasons cited include access to a range of innovative technologies, business models, disruptive behavior and ideas that they don’t necessarily have the capacity, capability or culture to develop internally. Correspondingly, the survey outlines how businesses are prioritizing FinTech investment in payments, mobile applications and InsurTech as key areas of interest. These investments take multiple forms, with more than a quarter of FS companies (29 percent) planning to engage with FinTechs via a range of partnerships, collaborations or joint ventures. A further 19 percent plan to invest in FinTechs, either directly or through their corporate venture capital arm, and 13 percent plan to acquire or buy FinTechs on an outright basis. Lastly, we outline the challenges faced by FinTechs and banks/financial institutions alike in collaborating with one another and how best to navigate these issues.
3. The shifting landscape of regulation and technology:
Regulators continue to walk a fine line, balancing the need to foster competition and innovation while protecting consumers and ensuring consistency and fairness across markets. Despite several regulators announcing various innovation-focused initiatives, including regulatory sandboxes, the survey reveals that many in the banking and FS world feel that regulators are still some distance from reducing regulatory hurdles effectively and easing tensions between innovation and protection. Almost three-quarters of participants agree that regulatory and compliance requirements are limiting businesses from utilizing disruptive technology and business models. However, the story differs by country: 80 percent of participants in Singapore and 57 percent of participants in the UK score their respective regulator highly in terms of its progressive approach and behavior; but this figure drops to 21 percent in the US, and 18 percent in Hong Kong, highlighting some of the key global variances in the approach and attitude of different FS regulators. This paper further explores existing barriers to innovation, the main areas of regulation that financial institutions want to change, and how regulators can most effectively encourage disruption.
4. Payments and cryptocurrencies:
This section addresses contemporary trends in the payments industry, and illustrates where innovation has been most prevalent in the last couple of years. Consumer trust is identified as the most significant obstacle to payments innovation. Views diverge between innovations in mobile payments and e-wallets (17 percent), real-time payments (14 percent) and digital tokens and cryptocurrencies (14 percent) as to the key priority areas of focus in this market. Indeed, the increased widespread adoption of distributed ledgers and blockchain to facilitate cryptocurrencies was reflected in the survey results: 31 percent of respondents expect central banks to add cryptocurrencies to their balance sheets in the next five years, while 18 percent expect them to establish their own cryptocurrencies. Seventeen percent of asset managers have, or are considering developing, a strategy for cryptocurrency or crypto-assets. The section also identifies and discusses the most significant risks and challenges faced by the payments and cryptocurrency sectors.
5. Cybersecurity and data monetization:
The final section reveals that cybersecurity is still viewed as one of the most important and present threats to the industry. This is unsurprising, given the severe damage a cyberattack can do to a firm’s reputation in an industry that runs on trust and security. Just over eight in ten (82 percent) of all respondents are worried about an attack and the detrimental effect on their businesses. Retail banks in particular, at 80 percent of such respondents, are significantly worried about a cyberattack, and keeping security arrangements in step with the speed and sophistication of attacks remains a major concern. The survey also reveals key strategic opportunities developing across the industry through the use of artificial intelligence (AI) and advanced data analytics to better commercialize and monetize the vast amounts of data that organizations hold. The analysis shows that banks, FS companies and FinTechs plan to undertake a range of data-driven strategic initiatives in the next two years. Thirty five percent of survey participants plan to better utilize and monetize data in the next two years, with that figure climbing to over 40 percent for banks, who have access to valuable customer insights through the large amounts of data they hold. This section further explores the impact of data protection/privacy regulation and open banking initiatives on data-monetization strategies.
It’s an interesting paper and, if you found this teaser interesting, you can download the whole 40-plus page report here.