Financial firms are at a high risk of disruption from tech-driven competitors, but rather than fighting or hiding, a majority of traditional companies are moving to embrace their disruptors, according to a new PricewaterhouseCoopers LLP report.

The report, which is based on a survey of more than 1,300 senior executives in the financial services and financial technology sectors across 71 countries, found that more than 80 percent of traditional financial institutions believe that at least part of their business is at risk. On average, executives fear, they could lose up to 24 percent of their business this year to startups.

In North America, the percentage of execs who worry about disruption grew to 82 percent in the most recent survey from 69 percent last year. To respond to the threat, three-quarters of incumbent institutions are boosting internal efforts to innovate and 56 percent say they have “put disruption at the heart of their strategy,” increasing investment in innovation and partnering with fintech firms to reduce costs and improve services.

The fintech sector is certainly on a roll. Funding of startups in the sector has increased at a compound annual growth rate of 40 percent over the last four years, representing a cumulative $40 billion investment. That investment is increasingly coming from mainstream businesses – including many established financial firms – rather than from venture capital.

Startups present the greatest threat to incumbents – 75 percent of survey respondents cite them as major disruptive forces – but they’re not the only ones jockeying for position. Financial infrastructure companies, e-retailers, technology companies and social media/Internet platforms are also seen as major disruptive forces.

Hug a disrupter

But rather than burying their heads in the sand, many established financial firms are partnering and investing in their disruptors. Forty-five percent say they are partnering with fintech companies, up from 32 percent last year. And an overwhelming 82 percent report that they’re ready to partner with or invest in fintech companies over the next three to five years.

Europe is leading the way in this respect, with more than 65 percent of respondents from Germany, Belgium and the Netherlands reporting that they are already partnering with fintech firms. The U.S. is in 12th place at 53 percent.

Incumbents have certain advantages that can prevent them from becoming the next Blockbuster LLC or Eastman Kodak Co. One is that their markets are highly regulated, which raises the cost and time required for upstarts to enter. However, regulation can also inhibit internal innovation, a problem cited by 54 percent of respondents.

Another is that the established firms already have customers, whereas most fintechs are still struggling to get a foothold in a crowded market. This is the principal factor driving partnerships and investments by incumbents. For example:

• J. P. Morgan Chase & Co. is partnering with online lender On Deck Capital Inc. to improve loan processing for its small business customers.
• Cardlytics, Inc. has signed up more than 1,500 financial institutions to use its digital advertising platform.
• Twenty of the world’s largest banks are partnering on the FinTech Innovation Lab to nurture new technologies that they can adopt.

High barriers to entry don’t give incumbents an excuse to relax, the researchers said. PwC DeNovo, the consulting firm’s fintech subsidiary, estimates that 30 percent of consumers plan to increase their use of nontraditional financial service providers and only 39 percent say they’re committed to sticking with established firms.

The industry’s attention is currently centering on two technologies in particular: artificial intelligence and blockchain. Nearly half of large fintech companies are investing in AI right now, compared to only 30 percent of established firms. AI is seen as being a promising way to create unique customer experiences, improve investment strategies and speed new products and services to market.

Blockchain, a technology for enabling trusted and secure transactions between anonymous parties, is expected to be used by 77 percent of incumbents by 2020. Blockchain has particular relevance to payments, trades, digital identity management and post-trade settlement, researchers said. It can cut costs, shrink closing times and increase the volume of transactions a firm can process.

The bright spot for incumbents: PwC researchers estimate that investments in fintech technologies will expected to yield a return on investment of 20 percent annually.

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