How financial institutions can align their fintech strategy with core business goals to drive return on investment.
No longer seen only as a disruptive force in the financial services industry, fintech innovation is now drawing the attention of traditional financial institutions for its potential to spur positive change. For evidence of this shifting focus, one need only look at current trends in corporate venture capital (CVC) investment.
According to KPMG's Q2'17 Pulse of fintech report, CVC investors have become key drivers of global investment in fintech, providing more than to fintechs worldwide and accounting for more than 21 percent of all activity in the first half of 2017.
While many corporates are using fintech investment as a means of sourcing solutions to specific business problems, others have broader motivations. Some are looking to realise a financial return from fintech investment
or responding to pressure from capital markets that reward a good R&D story.
Early players with 2-3 years of fintech venture capital (VC) activity at their backs are looking to realise a return to support a business case for continued investment. The horizon for returns for corporates is often shorter than inVC firms; a 5 year time frame is common due to reporting cycle pressures.
As financial institutions' investment arms become more established, many are focusing on later-stage deals, seeking the ability to grow and scale through market-proven solutions. CVCs are also diversifying their portfolios by investing in technology firms in sectors adjacent to the financial industry.
Investments in areas such as know-your-customer (KYC), biometric security for banking apps and digital payments solutions are all reaching a point of maturity. Digital wallets are another high-potential area showing increasing traction, though market saturation suggests likely consolidation. Artificial intelligence and blockchain show significant potential but have a long horizon for returns. Other, more speculative, areas –including headline-grabbing fintechs – are still years from showing a return.
KPMG's 2017 global fintech survey suggests that less than half of responding financial institutions reported having a full fintech strategy, while 10 percent say they have no strategy at all. These gaps can have serious consequences as the fintech landscape continues to transform.
Financial institutions looking to better align their fintech strategy with core business goals are encouraged to consider the following three key areas.
Responding to these questions will likely have significant implications for the organisation's financial, business and operating models and the way they identify new fintech capabilities to support their aspirations.