UK financial services leaders fear 40 percent revenue loss due to FinTech disruption

BY Fraser Tennant

Sixty-one percent of UK financial services industry leaders fear losing as much as 40 percent of their revenue to standalone FinTech firms, according to a new PwC report.

The report, ‘Redrawing the lines: FinTech’s growing influence on Financial Services’, highlights the views of the leaders of large, small and medium sized financial services companies in the UK, noting that, in comparison to the 61 percent of UK respondents that expressed fears over a substantial revenue loss, 51 percent of global financial services leaders believe their revenue is at risk.

However, the PwC survey also found that almost half of UK firms (47 percent) say they plan FinTech acquisitions over the next three to five years. Eighty-one percent indicated that they plan to initiate strategic partnerships with FinTechs over the same period.

“The financial services industry has embraced FinTech to help drive change and innovation,” said Steve Davies, EMEA FinTech leader at PwC. “FinTech collaboration, and innovation more widely, is not about jumping on the latest bandwagon – it is about finding the best, most efficient way to deliver your business strategy and ultimately better serve your customers.

“The UK’s financial sector seems to have a more realistic understanding of the long-term returns on targeted investments. Managing expectations around returns is important, particularly for firms facing significant cost pressures. Activity in the UK ranges from partnering with FinTechs startups, financing in-house incubators, and deploying new solutions, to testing use cases in areas like blockchain. There is a tension between the time needed for new ideas to mature and the expectations of firms seeking to collaborate with FinTech startups.” 

The survey also found that UK financial services firms currently dedicate 9 percent of their annual turnover to FinTech and IT projects – a total well below the global average of 15 percent. That said, UK firms are more realistic in their expectations of return on investment (ROI) with FinTech, with respondents saying they expect an annual ROI of 13 percent, while firms in the rest of the world expect an average ROI of 20 percent.

Mr Davies concluded: “Embracing FinTech is as much about different ways of working and problem solving as it is about deploying new technology. A sustained focus on innovation is much needed and can only be a good thing for customers, and the firms themselves.”

Report: Redrawing the lines: FinTech’s growing influence on Financial Services

AI is now the focus for UK FinTech startups, reveals new report

BY Fraser Tennant

FinTech startups in the UK are increasingly focusing on building smarter and faster machines as well as gaining a better understanding of the potential for artificial intelligence (AI) to solve customer problems, according to a new report by PwC and Startupbootcamp.

In ‘Start-up view: a year in FinTech’, based on data from Startupbootcamp’s FinTech accelerator programme and UK FinTech deals in 2016, the report’s authors reveal a major cultural shift over the past 12 months and cite Enterprise Bot – virtual assistants that can be used by banks to improve customer service – as a good example of how AI and machine learning is being used to solve real-life customer issues.

Among its key findings, the report notes that: (i) UK-based FinTech startups made up 34 percent of all applications to Startupbootcamp in 2016 (up from 22 percent from 2015), demonstrating the constant growth of innovation and wealth of talent in the UK; (ii) nine of top 20 UK FinTech deals were completed post-EU referendum, with investment totalling $368m; and (iii) the UK’s FinTech sector has continued to progress following the EU referendum, with FinTech ‘bridges’ being built between London and China, South Korea, Singapore, India and Australia.

“Despite political, economic and financial uncertainty causing people to believe FinTech might be derailed, we have yet to see any real impact," said Francisco Lorca, managing director of Startupbootcamp FinTech London. “This year, we have seen the sector’s entrepreneurs, including the Startupbootcamp FinTech 2016 cohort, consistently proving that they have genuinely transformative ideas to offer – and that these ideas are commercially viable.”

However, despite all the entrepreneurial spirit and transformative ideas, the report does make clear that investors are less keen to focus on this area, with many saying that ‘it remains too soon to invest in smarter, faster machines'.

 “While questions remain on how big players can measure their success in FinTech, the reality is investment in innovation is now necessary for financial services companies to keep pace with competitors both within and outside their own industry," said Steve Davies, EMEA FinTech leader at PwC. “As the UK’s position in Europe post Brexit becomes clearer, startups from across the world will continue to travel here to work with international investors, partner with leading financial firms and develop under a forward thinking regulator.”

Noting that the UK is likely to remain a global FinTech centre despite Brexit, Mr Lorca concluded: “One can only imagine what will come next, but both incumbents and startups should be prepared to embrace change.”

Report: ‘The start-up view: a year in FinTech’

Brexit will be “hard” and pose “complex” operational challenges for banking industry, says new report

BY Fraser Tennant

Brexit will be “hard” and pose “complex” operational and transformational challenges for banking services in the European Union (EU) and beyond, according to a new report compiled by PwC on behalf of the Association for Financial Markets in Europe (AFME).

“The report, ‘Planning for Brexit – Operational impacts on wholesale banking and capital markets in Europe’, aims to provide policymakers and other industry stakeholders, both in the EU27 and the UK, with a fact-based analysis of how these challenges are likely to affect the financial services industry”, said the AFME in a statement.

To compile the report, PwC gathered information from previous case studies and from 15 banks spanning a range of sizes, activities, origins and legal entity structures. They include those EU27 headquartered, UK headquartered and non-EU headquartered banks.

One of the key findings in the report is that the Brexit transformation will be highly complex for wholesale banks as it contains many interdependent activities. Those firms providing a significant proportion of current industry capacity need to execute transformation programmes which will extend beyond Article 50 timescales. In some cases this may be up to three years after Brexit has been completed or even longer if the post‐Brexit trading relationship between the EU and UK remains unresolved for a protracted period.

Furthermore, in executing their transformation programmes, banks will be heavily dependent upon timely approval of licences by their new EU regulators – a critical step in the implementation of new business models which is likely to occur at a time when regulators will see a peak in requests following Article 50 activation.

In order to assist the wholesale banking and capital markets industry support European corporates and continue to help growth across all of Europe, the report recommends that policymakers: (i) clarify with each industry participant as soon as possible the structure of any interim business models that may be deemed acceptable immediately post‐Brexit; and (ii) clarify as soon as possible any future permanent terms for the provision of wholesale banking and capital markets services between the UK and EU post‐Brexit.

The report also states that, following Brexit and agreement of any new market access arrangements, an implementation period of at least three years must be provided to allow banks to complete their adaptation and 'grandfather' transactions that are in force at the time that the UK leaves the EU.

News: Banks must plan for 'hard' Brexit, industry report warns

New ‘Basel IV’ capital requirements proposed for banking sector

BY Fraser Tennant

In what is a crucial period for the European economy, new proposals for setting the capital requirements for the banking sector have been officially unveiled by the Basel Committee on Banking Supervision (BCBS).

The proposals, supposedly the final set of revisions being made to the Basel III Framework (part of the BCBS’s continuous effort to enhance the banking regulatory framework), clarify rules on combating money laundering and terrorist financing in correspondent banking. Many commentators have dubbed the latest modifications, ‘Basel IV'.

The first accord, Basel I, had three objectives: (i) to make sure banks held sufficient capital to cover their risks; (ii) to level the playing field among international banks competing cross-border; and (iii) to facilitate comparability of the capital positions of banks.

The BCBS’s revised proposals are intended to ensure that banks conduct correspondent banking business with the best possible understanding of the applicable rules on anti-money laundering and countering the financing of terrorism. According to the BCBS, the draft proposals reflect growing concerns in the international community about banks avoiding these risks by withdrawing from correspondent banking, which may, in turn, affect the ability to send and receive international payments in entire regions.

"The proposed revisions develop the application of the risk-based approach for correspondent banking relationships, recognising that not all correspondent banking relationships bear the same level of risk," says the report.

The proposals follow the publication by the Financial Action Task Force (FATF) of its guidance on correspondent banking services (October 2016). The BCBS seeks to clarify the expectations of banking supervisors, consistent with the FATF standards and guidance.

In response to the BCBS’s proposed revisions (as well as those already globally agreed), the European Commission has published its first proposals for calibrating capital and liquidity requirements in the form of a Capital Requirements Directive and Resolution (CRD V and CRR II) – proposals which address the market risks inherent in banks’ trading activities, as well as introducing the concept of “proportionality".

“Europe’s move to implement ‘proportionality’ is an important step," said Colin Brereton, PwC’s EMEA FS advisory services leader. “As in the US, the largest EU banks will remain subject to the full scope of regulation; ultimately, this should improve the ability of smaller banks to compete, to the benefit of bank customers.”

The consultation on the BCBS’s proposals is open until 22 February 2017.

Report: Basel Committee on Banking Supervision - Consultative Document

Banks find path to profitability blocked

BY Richard Summerfield

Banks across the continent have struggled to achieve profitability since the onset of the financial crisis nearly a decade ago. As the crisis disappears in the rear view mirror, many analysts had hoped that financial institutions would have returned to profitability by now, but as a result of numerous head winds many are still struggling - a situation that appears likely to continue for some time, according to new report from  KPMG.

The firm’s data suggests that banks across the continent will continue to struggle to achieve profitability in the coming years due to higher capital requirements, perpetually low interest rates and the weakness of the local economy.

Marcus Evans, a partner in KPMG’s European Central Bank office, said that European banks were still grappling with low or negative interest rates and mounting capital and regulatory costs. “The successful banks will restructure their balance sheets to minimise the impact of new regulations and reduce their cost‑to‑income ratios through smart use of technology,” he said. “Reversing the profitability of European banks is not a lost cause but it will certainly be a lot of hard work.”

KPMG’s report, 'The Profitability of EU Banks: Hard Work or a Lost Cause?', suggests that Europe’s banks are set to continue to see profitability slip out of reach with the average return on equity across all banks in the EU remaining static at around 3 percent. The cost of capital, however, is considered to be around 10 to 12 percent, according to KPMG.

Regulatory pressure, which has been a notable feature of the global financial market over the last decade, may also be ramped up in the near future. The Basel IV regulations, a more rigorous set of rules, could add almost 0.5 percent to the overall cost of European banks' funding. As Basel IV looms ever closer, the pressure on Europe’s banking sector is only set to increase.

The issue of non-performing loans (NPLs)  is also a major millstone around the neck of European banks. With a total of $1.3 trillion, these NPLs are beginning to weigh heavily and will likely have a detrimental effect on lending ability for the foreseeable future.

Report: The Profitability of EU Banks: Hard Work or a Lost Cause?