Questions and Answers FinTech

@PwCFinTech Q&A April 2016 What is FinTech? Financial technology—FinTech for short— describes the evolving intersection of financial services and technology. The term can refer to startups, technology companies, or even legacy providers. The lines are blurring, and it’s getting harder to know where technology ends and financial services begin. The term FinTech is often tossed around in the media and in casual conversation. And while many use the term, its specific meaning often gets lost somewhere along the way. Startups use technology to offer existing financial services at lower costs, and to offer new tech-driven solutions. Incumbent financial firms look to acquire or work with startups to drive innovation. Technology companies provide payment tools. These can all be seen as FinTech. Look beyond the name and you’ll see some of the most exciting industry developments in a generation. We caught up with Haskell Garfinkel and Dean Nicolacakis, PwC’s US FinTech Practice co-leads, to better understand the FinTech ecosystem.

Questions and answers Q. Who’s doing this? What does a typical Q. In a recent presentation, Haskell referred FinTech company look like? to “FinTech as a verb.” What exactly did he mean by that? A. When people think of FinTech, they often focus on startups, breaking into areas that A. FinTech isn’t static. We see it as the banks and other legacy financial institutions evolving intersection of financial services and have dominated. But we think about all the technology. When we talk about the As, Bs, players in a larger FinTech ecosystem, which Cs, and Ds, we think of them as sectors in we refer to as the As, Bs, Cs, and Ds: motion, all moving toward each other over time.  As are large, well-established financial institutions such as Bank of America, For example, financial institutions are Chase, Wells Fargo, and Allstate. We becoming more technology focused. At the sometimes refer to these as same time, big tech companies are offering “incumbents.” peer-to-peer payment solutions over social  Bs are big tech companies that are active networks and email. Meanwhile, disruptors in the financial services space but not are providing financial services that, until exclusively so, such as Apple, Google, recently, you could get only from banks or Facebook, and Twitter. financial advisors.  Cs are companies that provide Q. Where have you seen the most disruption infrastructure or technology that in financial services so far? facilitates financial services transactions. This broad group includes A. FinTech disruptors started by offering companies like MasterCard, Fiserv, First products and services in payments and peer- Data, various financial market utilities, and exchanges such as NASDAQ. to-peer lending. Because of this, these have  Ds are disruptors: fast-moving been the most disrupted areas to date. We companies, often startups, focused on a can think of this as “FinTech 1.0,” in which particular innovative technology or new market entrants have focused largely in 1 process. Companies include Stripe the business-to-consumer (B2C) space. (mobile payments), Betterment (automated investing), Prosper (peer-to- peer lending), Moven (retail banking), and Lemonade (insurance). 1 Of the many inaugural FinTech “unicorns” (the term that refers to companies with valuations of US $1 billion or more), most had core businesses focused on B2C lending and payments. FinTech Q&A 2

Q. What do you see unfolding over the next For incumbent financial institutions to 12 months? succeed, they’ll have to do three things well: A. Looking forward, we expect FinTech  Continuously scan the environment to disruptors to continue to expand into other identify new threats and opportunities. areas within financial services. There’s a lot of  Quickly understand the effect that interest in areas like marketplace lending, emerging trends and technologies could credit underwriting, digital cash, treasury have on their business.3 functions, deposits, and bill payments. We  Come up with solid strategies to react— also anticipate a lot of activity in the robo- advice and wealth management space over from acquiring or working with FinTech the next year. startups to building their own innovative solutions. Perhaps more importantly, we predict a lot of FinTech innovation in the next 12 months in Q. Do you have any recommendations for the the business-to-business (B2B) space. You longer term? can think of this as “FinTech 2.0.” Here, expect tech innovations like blockchain to A. Everyone needs to recognize that this isn’t come on line. As they do, they’ll start to going away. It’s the “new normal.” Over the radically alter business processes and drive long-term, financial institutions are going to down costs. We’re already witnessing a lot of have to make some fundamental changes. firms exploring how they can apply these They’ll need to: breakthrough technologies. Done right, there are some real efficiency gains to be had.2  Become more agile. Incumbents tend to have long planning and delivery Q. What should incumbents do about all this? cycles. They’ll need to change this as Do they need a FinTech strategy? they incorporate emerging technology into their businesses and partner more A. We see incumbent banks, asset managers, with disruptors. and insurance companies looking for ways to  Manage the business from the play defense and offense at the same time. “inside out” instead of from the And that’s reasonable. You have to know how “outside in.” FinTech offers amazing a disruptive FinTech development could hurt potential, but that can actually be a your business, even as you’re looking for ways distraction. Institutions have to start to take advantage of the technology. with their own needs in mind, rather The disruptors themselves take different than working backwards to figure out approaches. Some target specific niche areas how to use the latest technology. of the industry. Others are using new  Change the way they approach technologies, such as blockchain, in ways that innovation. Most incumbents still will cross a lot of boundaries. struggle with finding and implementing innovative ideas. There are ways to do it well, though. In fact, they can learn from disruptors. Once you’ve figured out how to test-and-learn, a lot of other things fall into place. 2 For more information on blockchain, see PwC Financial Services Institute, “Making sense of bitcoin, cryptocurrency, and blockchain” PwC, Feb 2016. 3 For more information on our new platform focused on the impact of FinTech innovation on financial services, visit http://www.strategyand.pwc.com/denovo. FinTech Q&A 3

www.pwc.com/fsi Additional information For additional information about this FinTech Q&A A publication of PwC’s or PwC’s Financial Services Practice, please contact: Financial Services Institute Marie Carr Haskell Garfinkel Principal (408) 534-4727 Cathryn Marsh [email protected] FSI Leader https://www.linkedin.com/in/haskellgarfinkel John Abrahams Director Dean Nicolacakis Kristen Grigorescu (415) 498-7075 Senior Manager [email protected] Greg Filce https://www.linkedin.com/in/dean-nicolacakis-801255 Senior Manager Ryan Alvanos Senior Manager Follow us on Twitter @PwC_US_FinSrvcs and @PwCFinTech © 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. At PwC, our purpose is to build trust in society and solve important problems. PwC is a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com/us