Traditional financial firms ramping up investment to meet fintech challenge

But, less than a quarter see themselves as leaders in digital developments.

UK law firm TLT’s Digital Banking report found that online banking (62 per cent), in-branch technology (42 per cent) and improving or replacing existing IT systems (39 per cent) were the top priorities for the increased spend on technology. Data consolidation (72 per cent) was the priority operational IT investment.

TLT’s research mirrors that of specialist recruitment consultancy Robert Half Financial Services which also found over half1 (54%) of traditional financial services firms, such as banks and investment houses, are increasing their spend on new technologies in the next 12 months.

While TLT’s survey of firms found investment being driven by; he need to generate new business (86%), reduce costs (82%) and improve security (78%). Increasing customer loyalty through technology is also a key ambition (73%), Robert Half found the need to meet the challenge of new market entrants and the dramatic rise of digital ‘challenger’ business models throughout the financial services sector as the compelling force.

Online investment firms (26%) and challenger banks (24%) have been identified as the new market entrants to cause the most disruption to traditional financial services firms in the next 12 months. Twenty new challenger banks have lodged applications with the Bank of England in the hope of receiving a banking licence, according to officials.

The growth in new digital platforms has led to a dramatic increase in the ability of smaller players to challenge established providers. Peer-to-peer lenders (16%) and online traders (13%) were also cited as potentially the most disruptive new market entrants.

A substantial proportion of those surveyed by law firm TLT (55%) said they were more likely to invest in technologies endorsed by regulatory authorities. Cloud is a good example here, with FCA support and guidance driving increased use.

Unsurprisingly, financial institutions plan to use private cloud services (83%) with high levels of security for sensitive data. But, the use of public cloud (79%) and community cloud (61%) is also high, which is typically used for software development and administration.

James Touzel, head of technology at UK law firm TLT, said: “Banks have been encumbered by size, public scrutiny and a heavily regulated environment, particularly compared to their more nimble competitors. But they are now turning their technological firepower away from principally meeting regulatory standards following the 2008 crisis to developing new digital products and services.

“Our survey shows a determination to accelerate the pace of change to digital banking services and a growing convergence between financial institutions and developers.

“Banks are typically looking outside of their organisations for innovative technologies to develop, with nearly half reporting collaborations with fintech start-ups and around a third working with outside consultants. This approach will be central to banks evolution from mere holders of money, to advisers on managing it and aggregators of other services.”

The top three barriers facing financial institutions in their digital evolution are a limited capacity to invest (32%), legacy systems (29%) and security issues (28%). Respondents also cited threats from online only banking providers, digital currencies and peer-to-peer lending as three of their top five fintech threats, alongside peer-to-peer currency exchanges and international money transfers.

Mr Touzel commented: “Digital transformation is no easy task. Many traditional banks are weighed down by digital legacy issues that need untangling. The core of the dilemma is that with so many potential areas to invest in, and the wholesale digitisation of the customer experience, what’s the priority?

“The move to digital also brings legal issues. A future reliance on intellectual property and shared software will force banks into new contractual obligations. More extensive exploitation of customer data must be balanced against compliance with rules on how customer information can be used. It will also pose questions about cyber security and where liabilities rest.”

The report also found wide support for the new regulatory environment created by the Financial Conduct Authority to encourage technological innovation, with near universal satisfaction from those who had any involvement with Project Innovate. But, engagement with the FCA is generally low with 73 per cent of institutions having ‘limited or no engagement’ with the FCA when it came to digital developments.

Most financial institutions remain concerned about data protection (91%), as more services migrate online. Yet, only 58% reported that their institutions were ‘quite or very prepared’ for the EU General Data Protection Regulation, which will have a significant impact when it comes into force in 2018.

Surprisingly, only 5% of senior IT decision makers at financial institutions were aware that the EU Payment Services Directive (PSD2) will require them to share customer account details via open API access. James Touzel commented:

“Post-Brexit, some UK banks may have been hoping to move this off the agenda. But the CMA’s recent report into competition within the UK’s retail banking market has concluded that an open API banking standard is key to increasing competition.”

Meanwhile, financial sector recruiters Robert Half said this rapid expansion of the UK FinTech industry is exacerbating an ongoing war for talent, with the vast majority of financial services, banking and insurance executives (91%) concerned the growth of the FinTech sector will negatively impact their ability to attract skilled professionals with relevant sector experience, including 35% who say they are very concerned.

The research also highlights that 85% of executives in the financial services sector are nervous about their ability to retain their own top performers in the face of new FinTech competition, with almost a third (32%) very concerned. They are also worried that the expansion of FinTech enterprises will impact their ability to maintain or grow market share (83%), with 30% of these professionals extremely anxious.

Luke Davis, vice-president, Robert Half Financial Services UK, said: “Digital transformation plans are ramping up among both the front and corporate offices of financial services firms, largely the result of competition from the FinTech industry. This reaction is seeing established firms review their traditional models to offer customers, clients and employees new services using innovative technologies.

“Financial services professionals with experience of managing digital projects, such as enhancing the customer experience through digital technologies for mobile, tablets and wearable devices are in hot demand, particularly for interim roles, as firms seek to create digital solutions that are both innovative and compliant.”