London — The appetite for fintech investment by financial services firms looks set to continue over the next three years, despite concerns about Brexit, according to a report called The ABC of Fintech launched by international law firm Mayer Brown today.
In a survey of 70 UK-led financial services companies, 100% expect to purchase a product or commission work from a fintech company over the next three years. Recognising the need to expose themselves to expertise in new technologies and approaches, financial services firms cite increased cost saving, the delivery of new products and services, and customer services improvements as the top three benefits of collaborating with fintech in the Mayer Brown report.
"Larger financial services firms are having to get more flexible with their models. They have shown a willingness to invest in, or at least expose themselves to new types of business that they would not have considered even a few years ago," said Mark Prinsley, head of the Intellectual Property & IT group in London at Mayer Brown.
The survey reveals that collaboration between the two sectors has led to few outright acquisitions of fintech companies by financial services firms. Of the 50 UK-led fintech companies surveyed, more than half favoured acquisition by a financial services firm as their exit strategy, however two-thirds (67%) of financial services respondents stated that they are likely to make no fintech acquisitions in the next three years. This is in part due to the market but there are other contributory factors, such as cultural and system compatibility and regulatory issues.
"M&A levels generally are pretty low right now, which has certainly had a dampening effect on these particular markets — although activity levels are lifting, said Peter Dickinson, co-head of the global Business & Technology Sourcing group at Mayer Brown. "Large financial services firms are understandably risk adverse and will want to carry out detailed due diligence in relation to any fintech target company to make sure everything is in order — not just now, but historically."
Regulatory complexity was cited as the biggest barrier to fintech progress by financial services and fintech respondents alike, however there is a clear difference of opinion on what the ideal regulatory environment should look like. Sixty percent of fintech companies preferred self-regulation and limited regulatory oversight, whilst more than 76% of financial services respondents opted for clear regulatory oversight with some self regulation.
Guy Wilkes, a partner in the Financial Services Regulatory & Enforcement group in London at Mayer Brown, said: "Regulators say they're technology neutral, that the platform is not a factor, but it's undeniable that some regulations are not suited to some of the technology we're seeing emerge."
On top of concerns about the regulatory environment, there are signs of growing pessimism about the Brexit effect in the report, with 60% of financial services and 76% of fintech survey respondents believing this uncertainty will slow down the development of the fintech market. Despite the presence of this major issue of concern, all respondents were optimistic about the strength of opportunity for more integrated partnerships between traditional financial services companies and young fintech businesses.
Peter concluded: "For many large financial services firms, investing in a smaller fintech business is a relatively small financial commitment. The benefits of exposure to technologies that will drive down cost, boost customer engagement and open up new markets far outweigh potential downsides from various Brexit outcomes."
The ABC of Fintech forms part of Mayer Brown's focus on the digitisation of business called Lexicon of Next, which provides a focal point for businesses seeking to understand how their opportunities and risks are changing in a transformed business world.
Click here for a copy of the report.