PETALING JAYA: Universal banks, particularly small banks, will have an increasingly difficult time in challenging financial technology (fintech), regarded as a highly disruptive "game-changer" to conventional financial services in the country. According to Strategy& (part of Pricewaterhouse Coopers (PwC) South East Asia Consulting) director Paul Francis larger banks, for example Malayan Banking Bhd, can afford to invest in fintech experiments and develop internal centres of excellence, something which smaller banks lack. He told SunBiz that any bank that does not see fintech as a threat or an opportunity will be challenged by changing economics and customer expectations. “Financial institutions (FIs) that don’t have a progressive fintech mindset will be increasingly exposed to threats related to the rise of fintech, including loss of market share, pressure on margins and increase of customer churn,” he said. Francis opined that fintechs’ key advantage is that they attempt to leverage a lower cost base via the sharing economy or disintermediation to target banks’ existing customers. “The greatest advantage of fintechs is the low start-up cost, which enables them to be agile; they can test and fail until they find working models. “Also, individual fintech companies are very focused on specific niches. In comparison, universal banks are spread very thin and cannot afford to invest in all areas of their businesses,” he noted. According to Francis, banks that lack innovation and nimbleness will be immediately exposed to disruptions. “Whether FIs adopt digital or mobile strategies, integrating fintech is essential to stay competitive and relevant with the times,” he said. Among the top three challenges FIs face in integrating fintech are IT security, regulatory uncertainty and differences in business models. “These three challenges highlight the complexities traditional financial services organisations face when introducing new technologies into existing systems, which can lead to ambiguity, confusion and if not managed properly, paralysis,” Francis said. According to him, proactive financial institutions have embraced fintech in three main ways. These proactive FIs see fintech as a venture opportunity and they have invested with the view of fintech as a portfolio even if their conventional business is impacted. The second group sees fintech as an opportunity to develop internal centres of excellence and incubators to develop fintech both for use inside their businesses and also to sell services to fintech companies. Finally, the third group could be potential customers for fintech, who are keen on reducing their cost base by leveraging better economics. “In order for FIs to embrace fintech, they first have to adopt a fintech mindset. If they don't have a culture that is tech-focused and agile, it's very difficult for them to take fintech to a strategic level, leading to piecemeal adoption, with no distinctive/differentiated fintech offerings,” Francis said. In PwC’s Global FinTech report, "Blurred Lines: How FinTech is Shaping Financial Services", it was highlighted that traditional players need to think about how fintech mindset dovetails with their current business processes and shareholder requirements. Companies must also be clear about how they incorporate new ways of working specifically with respect to their value proposition.