Investment in FinTech companies could rise to as much as $150 billion over the next three to five years, according to PwC's report 'Blurred Lines: How FinTech is shaping Financial Services'.
The PwC report, which studied the rise of new technologies in the financial services (FS) sector and their impact on market players, is based on a survey of 544 respondents across 46 countries.
The findings showed that 83% of respondents from traditional FS firms felt at risk of losing business to standalone FinTech start-ups. In the case of banks, the figure was 97%.
Some 67% cited pressure on margins as the top threat to business, followed by loss of market share at 59%.
Vilaiporn Taweelappontong, Lead Partner for PwC Consulting (Thailand), said that FinTech is gaining significant momentum as banks and other FS companies increasingly look to protect their market share and profit margin from this disruptive trend.
"Disruption of the financial services industry is underway," Vilaiporn said. "Here in Thailand, we're seeing more venture capitalists on the lookout for the next FinTech upstart. Banks, on the other hand, are also active in getting into the action."
"As FinTech continues to displace the intermediary role played by traditional financial services companies, we expect players like banks and payments providers to become even more vulnerable to this disruption over the coming years."
The PwC report says that the banking and payments industries will feel the most pressure from FinTech firms.
Executives in the fund transfer and payments industry say they could lose up to 28% of their business to the FinTech companies over the next five years, while bankers are likely to lose 24%. This compares to around 22% in the case of asset and wealth management, and 21% in insurance.
At the other end of the spectrum, FinTech companies believe they can capture 33% of the incumbents' business.
Funding of FinTech sector more than doubled in 2015 to $12.2 billion, up from $5.6 billion a year ago, according to PwC's DeNovo platform.
FinTech is defined as the segment that is at the intersection of the financial services and technology sectors, where technology-focused start-ups and new market entrants create innovative products and services that compete with those from the traditional financial services industry.
PwC estimates within the next 3-5 years cumulative global investment in FinTech could well exceed $150 billion. Financial institutions and tech companies are stepping over one another for a chance to get into the game.
"As the lines between traditional finance, technology firms and telecom companies are blurring, many innovative solutions are emerging," said John Shipman, Asia FinTech Leader, PwC. "There is no clear straightforward solution to navigate this FinTech world."
Integrating FinTech comes with challenges
Among the most significant development in the FinTech space is the use of blockchain as a secure and distributed ledger technology that lowers costs, improves efficiency and increases transparency.
Blockchain represents the next evolutionary jump in business process optimisation technology. It could result in a radically different competitive future in the FS industry, where profit pools are disrupted and redistributed towards the owners of new, highly efficient blockchain platforms.
PwC also sees the potential value of smart contracts – contracts that are translated into computer programmes and, as such, have the ability to be self-executing and self-maintaining.
PwC's Global Blockchain Team has identified more than 700 companies entering this space. They believe 150 of them are worthy to be tracked and 25 of these companies will likely emerge as market leaders.
Although 56% of the respondents recognise the importance of the blockchain, 57% say they are unsure or unlikely to respond to this trend.
PwC's survey shows the most widespread form of collaboration with FinTech companies is joint partnership (32%). This is indicative of FS firms not being ready to go all-in and invest fully in FinTech, it said.
Asked what challenges they face in dealing with FinTech companies, 53% of incumbents cited IT security, followed by regulatory uncertainty (49%), and differences in business models (40%).
In the case of FinTech companies, differences in management and culture (54%), operational processes (47%), and regulatory uncertainty (43%) were deemed the top three challenges when dealing with traditional FS firms.