Out-Law News | 29 Jan 2019 | 9:30 am | 2 min. read
Just 2% of high-growth financial firms that responded to a survey said they had prioritised investment in back office technology over the last three years, compared to 77% which said they had prioritised investment into customer-facing improvements.
In November the House of Commons Treasury Committee opened an inquiry into IT failures in the financial services sector and their effect on consumers against a backdrop of high-profile incidents. The number of IT failures at UK financial firms increased 138% over the last year, to 600, according to research by the Financial Conduct Authority (FCA).
Financial services expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that it was vital for firms to invest in back office technology to reduce the risk of operational incidents, such as systems failures and data breaches.
"Financial services companies can be seriously undermined by underinvestment in the back office," he said. "The race to capture market share through customer-friendly technology is, understandably, very important, but that shouldn't be at the expense of essential architecture."
The figures emerged from research conducted for Pinsent Masons by Mergermarket, into the characteristics shared by Europe's fastest growing companies. The latest report, which looks at fast-growth companies in the financial services sector, finds that firms are pursuing disruptive technologies, including through strategic acquisitions of financial technology (fintech) or insurance technology (insurtech) firms.
For financial services companies, acquiring intellectual property (IP) or new technologies has become the most important objective of M&A activity, more so than increasing market share or expanding into new product lines. Of the respondents, 70% see acquiring new technologies as the most important objective of M&A activity over the next three years, up from 58% in the preceding three years; while just 46% see increasing market share as the most important, down from 50%.
Almost three quarters, or 74%, of respondents predicted fintech or insurtech would be the fastest-growing sector of their industry over the next three years, while almost half said that digital transformation was one of the two factors most likely to drive growth in the sector over the next three years.
Over the past three years, 77% of respondents had acquired a product or service from a fintech firm aimed at boosting their data and analytics capabilities. Respondents also anticipated more partnerships with fintech and insurtech firms over the next three years, supported by 84% of respondents. The number of businesses acquiring blockchain technology is also expected to more than treble over the next three years, according to the research.
"Effectively harnessing the power of technology is key for M&A activity and organic growth amongst financial services companies," said Alexis Roberts. "This is true across the entire financial services sector - not just fintech and insurtech."
"Technology continues to render more traditional M&A objectives, such as increasing market share or expanding into new geographies, as much less important. In crowded markets, financial services companies that fall behind in developing and using technology will find it difficult to keep up," he said.
The research also showed an increase in financial services companies entering into alliances and joint ventures, with almost nine in 10 respondents saying that they had taken a minority stake in another company to give them greater access to that business' talent, technology and market without a full-blown acquisition. Roberts said that these routes would prove increasingly popular in order to give firms "exposure to new technologies without the same commitment as M&A".