Accenture-The-Future-of-Fintech-and-Banking-digitallydisrupted-or-reima-

The Futureof Fintechand Banking:Digitally disruptedor reimagined?

Global investment in fintech venturestripled to $12.21 billion in 2014 2014 $12.21bn 2013 $4.05bn222

Executive SummaryInvestment in financial-technology recognise that merely navigating of legacy technology and managing(fintech) companies grew by 201% waves of regulation and waiting a large infusion of new talent.globally in 2014, compared to 63% for interest rates to rise won’tgrowth in overall venture-capital protect them from obsolescence. Embracing these themes and creatinginvestments, confirming this sector the right foundations createsas a hot ticket. Expectations for This Accenture report brings challenges to the rate of changenew digital start-ups in the industry together the views of 25 influential and approach to risk that are hard-continue to swell, with the amount financial services executives wired into the way banks currentlyof money flowing into first round involved in innovation, and adapt to innovation. This hands aninvestments alone growing by 48%1. maps out the activities that advantage to challengers who only established players have identified hit regulators’ radar once their newIt is clear that the digital revolution as necessary to allow them to business models have found ways toin financial services is under way, disrupt their own business model cherry-pick services and customers.but the impact on current banking rather than watch challenger Banks are anticipating this byplayers is not as well defined. models disintermediate them. creating new businesses within theirDigital disruption has the potential existing structures that adapt andto shrink the role and relevance of Openness, Collaboration and collaborate to meet these challengestoday’s banks, and simultaneously Investment are the critical themes and make better use, faster, of theirhelp them create better, faster, that emerge for existing banking enduring source of competitivecheaper services that make them players if they are to benefit from advantage – customer insight.an even more essential part of growth driven by new services andeveryday life for institutions and productivity. Banks also recognise Existing banks will know theyindividuals. To make the impact two other fundamental steps are winning in digital when bankpositive, banks are acknowledging to ensuring that they are net valuations start to factor in the futurethat they need to shake themselves winners from digital disruption: value of proven innovation, in additionout of institutional complacency and successfully dealing with the issue to protecting the core franchise. 3

IntroductionGlobal investment in fintech Figure 1: Global FinTech Financing Activity 800ventures tripled to $12.21 billion 750in 2014, clearly signifying that the $14,000 700digital revolution has arrived in the $12,000 650financial services sector. It is still $10,000 600unclear whether this presents more $8,000 550of a challenge or an opportunity for $6,000 500the incumbents in the industry. But $4,000 450established financial services players $2,000 400are starting to take bold steps to 350engage with emerging innovations. $ 300 2010 2011 2012 2014 Investment ($M) Global Deal Volume Deal Volume 2013 Global - First Round Global - Non-First Round Source: Accenture and CB InsightsThe fintech sector is often By value, this only represents 11% new technology deployment cyclescharacterised as a battle between ($1.38 billion) of total investments will be much quicker. However, 40%the old and the new. But it’s worth in the space, but growth is an of respondents felt that the currentnoting that the flood of new money impressive 48% year-on-year. time taken for their organisation togoing into the space is distributed The concern is that established deploy new technology was eitheracross both parts – in fact, with financial services players are not negatively impacting its value, ora slight bias towards investments doing enough to keep up to speed providing no net benefit at all.in more established companies. with this surge in new innovation Skills and culture also present aTwo of the biggest successes of 2014 investment. Accenture’s survey of challenge. Four out of five respondentsperfectly characterise this diversity in senior industry executives involved felt that when it came to culture andthe market. On one hand, First Data, in the FinTech Innovation Lab (see talent, they were only “somewhat” ora provider of payment processing page 7) reveals that 72% feel their “minimally” equipped for the digitalservices founded in 1971, raised bank has only a fragmented or age. Meanwhile, only half felt that$3.5 billion2 in private equity led opportunistic strategy to dealing their procurement processes andby KKR. On the other hand we have within digital innovation (see figure 1). technology were up to scratch.a true ‘new wave fintech’ poster Legacy technology and the difficultychild, Lending Club, the peer-to-peer of deploying new technology fast Figure 2: Strategy in place forlending platform founded in 2006 that is a big part of this issue. All of digital and innovationraised $865 million on the New York the respondents felt that legacyStock Exchange, valuing its business technology presented an issue to 4% Comprehensiveat $8.5 billion and hitting the record their organisation, but only just over 28% strategyfor the biggest US tech IPO of 2014. half said their bank had a strategic FragmentedLending Club’s successful IPO approach to decommissioning this 68% strategyshows that a new wave of financial old technology (see figure 2). Invest in one-offtechnology is building momentum, More worrying is the speed at opportunitiesand will have a significant impact which these banks implement newon the future of financial services. technology. The overwhelming Number of respondents = 25In fact, two-fifths of all the fintech majority agreed that, in the future,venture-capital deals done in2014 were first round investmentsin early-stage companies.4

Figure 3: How equipped do banks feel to address the challengesassociated with the next wave of digital innovations100% 80% 80% 80%60% 52% 48% 56% 36% 60% 36% 28%40% 48%20%0% 4% 12% 24% 8% 20% Financial Talent/skills Technological Procurement Cultural n Minimally equipped   n Somewhat equipped challenges challenges challenges challengesNumber of respondents = 25Regional Investment Data Figure 4: Global FinTech Financing ActivityOf the $12.21 billion invested in 2014, the US Investment ($M) 1 4,000 800 Deal Volumemakes up the lion’s share, but Europe experienced 12,000 700the highest level of growth, with an increase 10,000 2009 2010 2011 2012 2013 2014 600of 215% (year-on-year). Fintech investment 8,000 500growth in the UK and Ireland was slightly slower 6,000 400(up 136% to $623 million) although the region 4,000 300accounted for 42% of European investment. 2,000 200Following a relatively slow 2013, fintech investment 0 2008 100in Silicon Valley more than doubled (117%), pushing 0the start-up hotspot over the $2 billion mark, morethan the total investment in Europe ($1.48 billion). n United States  n  Europe    n  Asia-Pacific  n  O ther  —— Global Deal VolumeWhilst the UK and Ireland dominate Europe’sfintech investment, the rest of Europe is showing Source: Accenture and CB Insightspromise: the value of fintech investment inthe region grew more than twice as faster the Total investments ($M), 2014Figure 5: Top 5 European Regions for Fintech InvestmentUK and Ireland in 2014; the most significant Activity, 2014 Bubble = Total Deal Volumelevels of investments were in the Nordiccountries ($345 million), the Netherlands 800($306 million) and Germany ($82 million). 700 600 500 400 300 200 100 0 0 10 20 30 40 50 60 Total Deal Volume, 2014 ● UK & Ireland    ●  Nordics    ●  Germany    ●  R ussia    ●  N etherlands Source: Accenture and CB Insights Figure 6: Five-year Growth in Fintech Investment ($M) 5 2,500% 2,000% 1,500% 1,000% 500% 0% 2009 2010 2011 2012 2013 2014 —— U K & Ireland  —— Europe (ex UK & Ireland)  —— Global  —— Silicon Valley Source: Accenture and CB Insights

The future state How this digital revolution will Scenario 2: Digitally Reimagined impact the established financial Innovations are embraced at theDespite these complications which services industry is uncertain, business model level. The focusthe incumbent players in the but the following two scenarios is on making a customer’s lifeindustry are facing, three-fifths provide a structure for how things easier not on asset monopolies,of respondents to the survey felt may play out. It is important to and sources of revenue changethat established financial services recognise that there is no reason over time as customer insightplayers would survive and thrive in to believe either scenario will grows and the bank learns howthe digital future - either because apply to all banks – banks can to use collaboration with adjacentnew and existing banks would find still control their own destiny: business models to surprise andways to grow and enrich the market delight customers. Banks inoverall, or because the established Scenario 1: Digitally Disrupted this category see themselves asbanks would simply acquire the Caught in the headlights of having short term advantagesnew players (see figure 3). regulation and cost reduction, the in infrastructure and customer bank loses out to new players that data, but no long term right toYet it’s notable that the remaining provide more effective financial exist without converting thistwo-fifths (a significant minority) products and services attuned to the into services that solve emergingfelt the future was much more digital age. The bank continues with digital consumer frustrations.bleak. One fifth felt that the industry a product-based sales approachwould become disaggregated, rather than improving the customer When Accenture started its journeywhile the remaining fifth felt experience and as a result lacks with the FinTech Innovation Labthat traditional banks would lose the motivation to deal with legacy in NYC in 2010, no bank we spokemarket share, revenue, scale - and applications. Banks in this scenario with believed Scenario 1 couldimportantly, that margins would compete for a diminishing share of happen to them. The overridingfall or banking services would be wallet as their brands are relegated belief was that providingadded incrementally to non-financial in customers’ eyes to that of sustainable banking services orservices offerings (see figure 7). commodity utilities. They continue sub-services was too complex, to believe in the impregnable risky and regulated for new playersThese two camps represent the two nature of their business model to threaten the existing players.broad scenarios for the future of and that fast-following strategies Few banks now feel that thefinancial services in the fintech age. will remain the most successful. outcome of digital is so clear.Figure 7: Hypothetical banking future 8% n Banks lose market share 20% n  B anks are dis-aggregated n  F inancial services delivered at lower margin 56% n Core banking services are added to non-fs offerings 8% n Challengers acquired by incumbents 4% n All players position themselves to add-value 4% Number of respondents = 256

The FinTech Sachs, HSBC, Intesa Sanpaolo,Innovation Lab JP Morgan, Lloyds Banking Group, Morgan Stanley, Nationwide,The FinTech Innovation Lab is an RBS, Santander and UBS.annual mentorship programme Graduates of the programmefor entrepreneurs and early-stage enjoy a number of successes.companies that are developing On average, London start-upscutting-edge technologies for grew staff numbers by 55% andthe financial services sector. increased revenues by 170% sinceThe lab brings Chief Information graduating from the programme.Officers and senior IT decision The Lab also sets them up well tomakers from the world’s leading raise significant levels of capital.financial services firms together To date, the 14 London graduatesto mentor a handful of aspiring have raised more than $35 million.entrepreneurs, and to refineand test their propositionsover a three-month period.The FinTech Innovation Lab beganin New York in 2010, foundedby the Partnership Fund forNew York City and Accenture.In 2012, Accenture launched theprogramme in London, and thenHong Kong and Ireland in 2014.In London, senior executives from15 major global and domesticbanks participate, including Bankof America, Barclays, Citi, CreditSuisse, Deutsche Bank, Goldman 7

Three behaviours enabling banksto be digital winnersOur interviews and analysis system, unbundle relevant services, In the retail banking space, Frenchpoint to three behaviours and build new services based upon bank Credit Agricole launched anin relation to fintech the bank’s platform facilitating open API as early as 2012, enablingthat banks believe could considerable innovation. The bank developers to build apps on top ofallow them to reimagine has also moved into partnership its services, and now has a range ofthemselves digitally: with foreign exchange specialist apps providing expense management, Currency Cloud4 to offer a current social payment and finance analysisAct Open account product that can be viewed tools to customers7. Not far behind, in seven currencies and offers BBVA launched the Innova Challenge8, foreign exchange transactions. a competition that involves software developers building new platformsOpen innovation is at the heart of Similarly, two former senior staff at and apps based on anonymisedthe digital revolution, exemplified Simple, the online bank acquired by client data from the bank.by the open source movement that Spain’s BBVA in 2014, have launched Possibly the biggest opportunity fromhas supported so much of the new a new business bank in the US called taking an open approach to innovationtechnology development in recent SEED which has a customisable is in the area of the Blockchain,years. For large organisations this interface5 to better allow small the protocol that underpins thetranslates as a process of engaging businesses to develop their own distributed architecture of the Bitcoinwith external technology solutions, tools and services. Firms have to cryptocurrency. It is early days forknowledge capital and resources apply for membership of the bank, at cryptocurrencies, and it is unclearearly on in an innovation process. which point they can use the bank’s what the long-term effects of theirOften it involves opening up the API to build their own banking tools. adoption will be on the financialorganisation’s own intellectual Established banks have also been services industry. However, it is clearproperty (IP), assets and expertise to getting in on the act, and the open that if established players are goingoutside innovators to help generate approach to innovation is gaining to benefit from this revolutionarynew ideas, change organisational significant popularity amongst the approach to finance, they will have toculture, identify and attract new skills, survey respondents. Forty percent of engage with a much wider range ofand discover new areas for growth. the banks we surveyed already have technical specialists and developersThe open concept is embedded in some open technical innovation outside their own organisations.many of the new fintech companies’ activities, while another 56% willapproaches. For example, Germany’s set one up in the next two years.Fidor Bank has established FidorOS3, a A great example in the capitalmiddleware with an open Application markets field is Goldman Sachs’Programming Interface (API) that placement of its proprietary sourcecan connect to existing core banking code on the online collaboration toolplatforms to offer a range of modern GitHub6. This allows external codersservices including lending money to to try and optimise it, fosteringfriends, sending money via Twitter and competition amongst erstwhilearranging an emergency 24-hour loan. Goldman Sachs programmersTheir open API also allows third and while potentially seeingparties to access all areas of the bank improvements from their efforts.8

Collaborate The big challenge and services to be created when for established combining the assets of twoThe concepts of collaboration – or players is their industries. For instance, mBank,“co-innovation” – are becoming organisational part of Commerzbank Group andmore important within the financial culture’s ability to Poland’s fourth largest by capital11,services and technology industries. adopt a collaborative partnered with telco Orange PolskaThis is confirmed by the survey, approach with in 2014 to begin offering a jointwhich reveals that three-fifths of new innovators (white-labelled) banking servicerespondents support the “Digitally and start-ups. for phones and tablets. mBank isReimagined” scenario for the seeking to enhance mobile bankingfuture, where the addressable Yet collaboration will need to through an app that allows fullmarket for financial service grows go a step further in future. In online banking functionality usingthrough complementary alliances order to maintain and grow a smartphone and a PIN code.between different players. value in these times of change, The big challenge for establishedTraditionally, financial services established players should look players is their organisationalincumbents have been comfortable to collaborate more closely with culture’s ability to adopt apartnering with others in their those in different industries and collaborative approach withown industry - especially where with different outlooks to identify new innovators and start-ups.there is an opportunity to share new ways to generate value. Over half of the respondents toprocesses or services that are Collaborative engagement with the survey believe they shouldconsidered “non-core”, and which start-ups has already become collaborate “fully” or “extensively”help all collaborators either particularly popular. Take the with other industries, while 80%reduce their costs or create a FinTech Innovation Lab model, which believe the value in working withnew market opportunity. brings together multiple banks to start-ups is bringing new ideasThere are many examples of these collaborate and provide mentorship to their business. Yet 56% claimpartnerships in capital markets to start-ups that could potentially that organisational culture is theand retail banking, but the most help their businesses. And the biggest area of their businesscommonly known examples FinTech Innovation Lab is not that needs to change in order toare in the payments space. For alone in this approach. In February work effectively with start-ups.instance, MasterCard was founded 2015, Australian banks helped toby a consortium of banks to set up a AUS$2million not-for-support interbank card payments profit start-up centre in Sydneyfor consumers in 1966, having to support new fintech firms10.realised the potential it had for Cross-industry collaboration is alsocustomer service and spending. crucial for future value generation.Another is SWIFT, the interbank Digital technologies thrive bypayments network founded enabling interesting productsin 1973, which functions as ashared utility owned by banks, acommunication standards authorityand connectivity systems provider9. 9

Invest capital invested through their equity A Desire to Reimagine stake, or as a measure of the valueVenture investing has always generated for the parent business. Accenture believes that banksbeen at the heart of the start-up While the former measure of ROI is have recognised the threat posedinnovation model. But now more than well understood, an investment return by digital and that they are avidlyever, established financial services here does not necessarily result in an exploring the opportunities. Theyfirms are taking this route to try innovation for the parent business. have recognised that, as John F.and generate innovation for their In fact, the two businesses may Kennedy once said, “Those who makebusiness. Corporate venture arms are never collaborate, yet still an ROI on peaceful revolution impossible willused by one-third of the surveyed paper is achieved. But, for the latter make violent revolution inevitable.”bankers and further third expect to approach, measuring the innovation Most have also concluded that welaunch one in the next two years. value for the parent business, are only beginning to understand theAmerican Express, BBVA, HSBC, there is still no consensus amongst full impact of digital technologiesSantander and Sberbank have all corporate venture arms about how an on society, let alone in the financialdeveloped corporate investment equity stake can be translated into services space, and that for thevehicles over the last four years, each improvements in innovation culture, most part early-stage fintechwith at least US$100 million to invest. technology or processes. There is also innovators need the support ofIn February 2015 AXA, the insurance the risk that a strategic investment large established banks as much asand investment management firm, will constrain the bank’s ability to those large organisations need thelaunched a €200 million fund to act adopt new technology as it develops. start-ups’ new ideas and energy.as “an accelerating force for start-up The fact remains that innovative start- Furthermore, three-fifths ofcompanies” in its areas of business. ups have a high innovation quotient, respondents said they were “somewhat”As with all investments, however, but need capital, and established or “extensively” open to sacrificingthe value can go up as well as financial services firms have lots of revenue in order to move to newdown – and with venture investment capital, but need to increase their business models. And a further quarterthe risks are significantly higher ability to innovate. In such a situation were comfortable with this revenuethan when investing in established it is inevitable that we are now seeing sacrifice to a “minimal” degree.businesses. Yet there is a further so much interest in financing fintech Re-imagining a business modelcomplication for a corporate venture companies – and we do not see this is exhilarating and exhausting.arm, because the return on investment ending any time soon. What has yet to Many battles must be fought andcan be measured in two ways: either be proved is how the innovation flows won to get momentum, to fail fastas a traditional direct return on back to those that are funding it. and to learn from mistakes. In conducting this research we have discovered a committed sense of purpose amongst leading bankers to do just this and we hope the FinTech Innovation Lab programme has and will continue to justify and reinforce this commitment.10

Methodology The list of deals included are Acknowledgements dynamic and constantly changing,This report used investment data as new companies are added to This report and the research wouldfrom CB Insights, a global venture the database; all publicly known not have been possible withoutfinance-data and analytics firm. fund raises for a company, which the generous participation ofThe analysis included global can include earlier rounds, are many people from the financialfinancing activity from venture back filled into the database. services industry and beyond.capital and private equity firms, In addition to this data,corporations and corporate Accenture conducted a surveyventure-capital divisions, of 25 innovation-focused seniorhedge funds, accelerators, and banking executives from acrossgovernment-backed funds. the banks that participate in the FinTech Innovation LabThe research also includes London and Dublin. The banksglobal exit activities of fintech involved represent 40% of thecompanies – including M&A top 10 global banks by marketand IPOs – and a number of capitalisation including two of theregional tracking dimensions. world’s top five banks; however,Fintech companies are defined these survey responses do notas those that offer technologies represent a statistically significantfor banking and corporate sample size, and should be usedfinance, capital markets, financial only as an indicative guide.data analytics, payments andpersonal financial management.1 C B Insights 6 h ttps://github.com/goldmansachs2 F irst Data Holdings, company 7 h ttps://www.creditagricolestore.fr/ announcement ‘First Data Announces $3.5 Billion Private Placement 8 h ttp://www.centrodeinnovacionbbva. Led By KKR’, 19 June 2014 com/en/innovachallenge/home3 F idortecs.com ‘fidorOS - the fast 9 h ttp://www.swift.com/about_swift/index and flexible middle ware’ 10 ‘New Knowledge Hub to strengthen Sydney’s4 w ww.currencycloud.com/ position as a global financial centre’, http:// case-study/fidor-bank www.trade.nsw.gov.au/, 3 March 20155 ‘API Banking With SEED’ http://docs. 11 T he Banker magazine, 2014 seed.co/v1.0/docs/getting-started INNOVATION 11

About Accenture AuthorsAccenture is a global management Julian Skanconsulting, technology services Managing Directorand outsourcing company, with Accenture Financial Servicesapproximately 319,000 people James Dickersonserving clients in more than 120 Accenture Financial Servicescountries. Combining unparalleled Samad Masoodexperience, comprehensive Open Innovation Lead, UK&Icapabilities across all industries andbusiness functions, and extensive Key Contacts:research on the world’s most Stephanie Leesuccessful companies, Accenture Marketingcollaborates with clients to help Accenture Financial Servicesthem become high-performance [email protected] and governments. Francois LuuThe company generated net revenues Media and Analyst Relationsof US$30.0 billion for the fiscal year Accenture Financial Servicesended Aug. 31, 2014. Its home page [email protected] www.accenture.com. For more information about the FinTech Innovation Lab www.fintechinnovationlab.com [email protected] @fintechinnolabCopyright © 2015 AccentureAll rights reserved.Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.