Disruption as a force for change (Part Two)

Every week, it seems that there is a new entrant to the banking sector claiming to be ‘disruptive’.

With all of this in mind, surely the market should not be encouraging new entrants to stake a claim.

On the contrary, there is a large amount of innovation and investment interest in the challenger sector. This interest is from new banking names to technology driven start-ups to existing firms encroaching on banking and payments.

This is growing at an alarming rate. Funding of fintech start-ups more than doubled in 2015, hitting $12.2bn in 2015 from $5.6bn a year before. Rather than sticking to their usual home territories of Silicon Valley and London’s Canary Wharf, fintech firms are expanding to wherever they see opportunity. Asia-Pacific is now one of the fastest growing regions for fintech, astoundingly quadrupling their fintech investment in the last year.

PwC believe that the current situation will lead to one of three scenarios:

  • The trend of multi-paced transformation continues: banks gradually adapt and consolidate, but not fast enough to prevent challengers from taking a chunk (the report states possibly 20%) of the market permanently;
  • The trend might quicken and reach a tipping point. This means that the challengers become the incumbent and the current incumbents fade away or, at best, are reduced to a utility role. In this scenario, a new banking crisis and more public intervention is possible, or
  • A third scenario, one that doesn’t accept the opinion that incumbents and challengers need to be locked in permanent combat, is that a new ‘symbiotic’ relationship is formed. A new banking system will be formed where ‘incumbent’ and ‘challenger’ are redundant terms. This would lead the market to address collectively customer issues and contemporary challenges such as financial exclusion, under-funding of lifetime financial security, and under-investment in new infrastructure and productive capacity. A rather optimistic scenario.

Miles Kennedy, financial service partner at PwC and the report’s co-author, told RBI: “The third of our possible scenarios is the most likely and the most positive of the three. It is not just wishful thinking; there is evidence to suggest that it is already underway. The combination of Brexit, ongoing economic weakness and the challenges faced by incumbents is likely to be a disrupter that only quickens the pace of change.”