in collaboration with World FinTech Report 2017Preface: FinTech Hype or Disruption? 8 | Executive Summary 4 Rise of the FinTech Movement 11 | Perfect Storm Enabling the Emergence of FinTech 12 | FinTechs Gaining Traction, If Not Market Share 14 | Traditional Firms Still Hold Some Competitive Advantages 10 FinTechs, Traditional Firms, Must Improve on Delivering Positive Moments of Truth to Customers 17 | Customer Experience Levels Low, but Mobile Likely Poised to Follow Path of Computer Adoption 17 | Gen Y, Tech-Savvy Embrace Mobile 18 | Moments-of-Truth Interactions Fall Short 20 | Gen Y and Tech-Savvy Customers Key to Driving Profitable Customer Behavior 16 Table of ContentsIn Face of FinTechs, Traditional Firms Struggling to Apply Innovation 23 | Eventual Impact of FinTechs on Traditional Firms Remains Unclear 23 | Executives Believe FinTechs Excel in Delivering Better Customer Experience 24 | Traditional Firms Increasingly View FinTechs As Partners 25 | Progress on Innovation Slow at Traditional Firms, Despite High Confidence 26 | Results in Innovation Not Yet Measuring to Effort 28 | Risk-Averse Cultures Squash Innovation 22 Blockchain Finds Numerous Applications in Financial Services Industry 30 Methodology 44 | About Us 46 | Acknowledgements 42 Inculcating Innovation Requires Methodical Approach 33 | Spreading Innovation Step by Step 35 | Culture Change Begins at the Top 36 | Disruptive Forces Loom for Traditional Firms 38 | Closing Thoughts from Our Executive Steering Committee 41 | Journey Continues for Traditional Firms 32World FinTech Report 2017 5 1 FinTechs are the new financial services firms that are less than five years old and have a relatively small but growing customer base 2 Traditional firms are generally financial services firms that have been in the business for at least five years and have a large, and established customer base 3 Moments of Truth (MoT) are defined as the moments when customers interact with their financial services provider and form or change an impression about that particular financial services provider, product, or service Preface: FinTech Hype or Disruption? The term FinTech 1might be both the most over-hyped and under-estimated term the industry has seen in decades. On one hand, from an investment standpoint, venture capital (VC) funding of the FinTech revolution has been staggering, resulting in billions of dollars of investment. We have seen a significant reduction in barriers to entry and customers digital expectation demands explode. However, very few start-ups have managed to use their agility and innovation to fill gaping holes in the customer experience left by traditional firms 2with viable business models that achieve scale and distribution. At the same time, traditional firms have largely struggled with clunky legacy systems, regulatory burden and leadership challenged with balancing short-term profitability and long-term viability. Executive conversations are increasingly revolving around the need for customer-centricity and the importance of developing customer-centric rather than product-centric solutions. However, are traditional firms effectively putting this philosophy into practice, and what specifically are those Moments of Truth (MoT) 3that have the biggest impact on customers choosing who they will leverage for their financial services needs? We have seen a plethora of investment and activity in innovation labs, hack-a-thons, building internal FinTech teams, and even acquiring start-ups. And while there have been a few exceptions to the norm, most of these investments have failed to deliver their desired outcomes. Too often, innovation investments are too disconnected from the business or too close to the business and handcuffed by legacy culture. Clearly, the investment and technology communities are enamored with FinTech. However, those investments have recently slowed down. What will be the real impact on the industry? Was it all hype or do they have viable business models to compete with traditional firms? What do customers think about these new players? Based on customer reactions, how should traditional firms respond? Do they have the ability to be agile and more innovative? What is preventing traditional firms from replicating the innovation solutions and services being provided by FinTechs? Are we truly seeing a disruption and revolution in the financial services industry or more of an evolution? Are the recent collaborations and partnerships between FinTechs and traditional firms a sign of more to come or could we be looking at completely new business models and a platformification of the business? In our inaugural Capgemini and LinkedIn World FinTech Report (WFTR), in collaboration with Efma, we address these important questions. Backed by a survey of more than 8,000 customers in 15 countries, as well as over 100 interviews with senior-level executives, and a world-class Executive Steering Committee, this report goes beyond the hype of FinTech. We look toward the future of Financial and Technology by diving deeper into how leading firms are successfully applying innovation, while also providing precise recommendations and discussing whether we will witness a fundamental shift in business models. Financial Services (FS) institutions may be facing one of their biggest challenges to date and likely the start of a long, disruptive journey. We encourage you to peruse our detailed examination of the specific actions institutions can take to better navigate this momentous shift. Thierry Delaporte Head of Global Financial Services Business Unit and Member of the Group Executive Board Capgemini Penry Price Vice President, Global Marketing Solutions LinkedIn Vincent Bastid Secretary General Efma6 We would like to thank our incredible Executive Steering Committee for their guidance and insights provided over the last few months. Throughout the report, we have included quotes and insights from our ESC, as well as those industry luminaries participating in our Agents of Change series. World FinTech Report Executive Steering Committee (ESC) Mariano Belinky Santander Managing Partner, Santander InnoVentures Guillaume Cabrere AXA CEO, AXA Lab Silicon Valley Teppo Paavola BBVA Chief Development Officer Matthias Kröner Fidor Bank AG CEO & Chairman Lubaina Manji Barclays Director, Head of Rise & Group Innovation Jim Marous The Financial Brand Co-Publisher Neal Cross DBS Bank Chief Innovation Officer Chris Gledhill Secco CEO & Co-Founder Naureen Hassan Morgan Stanley Chief Digital Officer, Wealth ManagementWorld FinTech Report 2017 7 Kara Segreto Prudential Mktg & Comms Lead Center for Next Generation Growth Clara Shih Hearsay CEO & Co-Founder and Author of Social Business Imperative Bill Sullivan Capgemini Financial Services Global Head Market Intelligence Rishad Tobaccowala Publicis Groupe Chief Strategist Jennifer Grazel LinkedIn Global Director, Vertical Marketing Chris Skinner The Finanser CEO and Author, ValueWeb Hardeep Walia Motif Investing Founder and CEO Eduardo Vergara Silicon Valley Bank Head of Payments ServicesWorld FinTech Report 2017 9 Executive Summary Rise of the FinTech Movement The rise of FinTech has been aided by a perfect storm, created by increasing customer expectations, expanding VC funding, reduced barriers to entry, and increased pace of technological evolution. Customers are embracing new FinTech providers, with 50.2% globally saying they do business with at least one non-traditional firm. Traditional firms hold an advantage over non-traditional firms as they closed the gap on areas of convenience and quality of service over the last year. FinTech, Traditional Firms Both Must Improve on Delivering Positive Moments of Truth Customers indicated significantly low levels of overall positive experience. Mobile, however, struck a chord with key customer segments of Gen Y and tech-savvy. Both traditional and non-traditional firms struggle to meet customer expectations on the most important Moments of Truth, which revolved around digital transactions, transparency, convenience, and proactive updates. Gen Y and tech-savvy customers, widely regarded as influential customers of the future, offer higher revenue potential. In Face of FinTechs, Traditional Firms Trying, but Struggling to Apply Innovation FinTechs have made headway into financial services, with close to two-thirds of executives stating FinTechs are setting the bar higher for the entire industry. Traditional firms have become more open to partnership with FinTechs, and they are pursuing a wide range of strategies in response to FinTechs. Almost as many firms are developing their own in-house capabilities (59.2%) as are seeking partnerships with FinTechs (60.0%). The actions of traditional firms to foster innovation have not measured up to the amount of effort put into them. Inculcating Innovation Requires Methodical Approach Adopting a step-wise approach for applying innovation for example, using the four stage Capgemini framework of Discover, Devise, Deploy and Sustain can be useful in helping institutions spread innovation throughout the organization. Securing senior leadership commitment, having a clear vision, and adopting a more innovative culture will be important for addressing disruption. Financial services firms need to be prepared for prospective future disruptive scenarios such as entry of BigTech or platformification, which can lead to a fundamental shift in the industry.Rise of the FinTech Movement Rise of the FinTech Movement The rise of FinTech has been aided by a perfect storm, enabled by rising customer expectations for more personalized and digital experiences, increased access to VC funding, reduced barriers to entry, and accelerated advancements in technology. But most important, the space has been ripe for FinTechs in large part due to traditional firms leaving a gap of unmet customer needs. Customers are embracing FinTech providers, with 50.2% globally saying they already do business with at least one non-traditional firm. Tech-savvy customers are supplementing traditional services with FinTech offerings twice as often as non-tech-savvy customers. Traditional firms hold advantages over non-traditional firms, closing gaps in key areas from just last year. Customers favor traditional firms in the areas of trust, quality of service, transparency, and security, and favor non-traditional firms in the areas of timely/ efficient service and better value for money.World FinTech Report 2017 11 Perfect Storm Enabling the Emergence of FinTech The financial services industry has undergone a considerable shift since the financial crisis, as traditional firms, once central to all financial relationships, have seen their relevance diluted by FinTech firms. A perfect storm of factors, including complacency on the part of traditional firms, increased customer expectations, lower barriers to entry, increased access to VC funding, and accelerated technological advancements (see Figure 1.1), have enabled FinTechs to quickly gain ground with solutions that cater to heightened customer preferences. have not traditionally had access. Whether its m-pesa and mobile wallets in Africa or low fee robo advice in the Western Hemisphere, we are excited by the solutions that are targeted at holistically helping people to improve their financial health no matter their age, level of affluence, or knowledge of financial products”. Aiding FinTech firms is the fact that traditional financial services firms have typically faced competing priorities, including increasing regulations, inflexible legacy systems, and siloed channels, adding to operational costs. Most FinTech firms, meanwhile, embark on their journeys as nimble startups, able to take advantage of next-generation technology without worrying about existing systems or cultures. Plus, they can use already available services in the cloud to save on investment costs. These lower barriers of entry have created a fertile ground for FinTech growth. Eduardo Vergara, Head of Payments Services at Silicon Valley Bank, notes, “The cost of starting a FinTech company has decreased significantly, leading to an increase in the number of FinTech start ups. Not all of them will survive, but those that do will have a significant and lasting impact on the Financial Services industry”. The low barriers of entry may eventually serve the purposes of more powerful firms. Neal Cross, Chief Innovation Officer at DBS Bank, noted, “In the future, banking will be everybodys business. Any organization, including the telecommunications and retailers, will be able to make money from finance”. In certain cases, regulators such as Financial Conduct Authority (FCA) in UK, are also pro-actively creating a conducive environment for FinTech by involving them in early stages of drafting regulations. New regulations such as Revised Payment Service Directive (PSD2) in Europe will provide an opportunity for FinTech firms to act as intermediaries between banks and customers. Simplified regulatory processes and removal of structural hurdles are expected to boost the innovation in financial services industry. Initial signs of regulators actions across different geographies are an indication that regulators are increasingly realizing the importance of innovation, though not all of them are proactive in their approach. Throughout the Report, be sure to check out our Agents of Change videos by scanning the QR code to watch the full interview. ce pni Finci rcei 201 Figure 1.1: Key Enablers of FinTech Firms Customer Demand Accelerated Pace of Technological Evolution Barriers of Entry VC Funding If you are a FinTech player, you need to talk to a number of VCs, and all it takes is for one of them to say yes and you can launch your product. In contrast, at a big bank you probably need to talk to a large number of people before you can launch a product, and all you need is for one to say no and it doesnt happen” Eduardo Vergara Head of Payments Services, Silicon Valley Bank Powerful BigTechs like Google, Amazon, Facebook, and Apple have raised the bar of customer expectations by delivering superior personalized and digital customer interactions. Inspired by the digital interfaces they encounter in their day-to-day lives, customers have started demanding similar levels of experience from their financial firms. At our London roundtable this summer, a UK banker noted, “Financial services for a long time has been about a product you buy and then you might get sub-par self- service afterwards. But providing an experience and actual self-service is what FinTech is going to be about in the future”. Traditional firms have been slower to respond to rising customer expectations. The f