Fintechs: Is the hype justified?
Martin Morris finds out if the debate surrounding the potential of fintechs is justified – and what the disruption they're causing means for business and banks.
Martin Morris finds out if the debate surrounding the potential of fintechs is justified – and what the disruption they're causing means for business and banks.
Justified hype or not, there’s little doubt fintechs have emerged as serious disruptors in the banking/financial services space in recent years. Yet even given their proven ability to deliver innovative products (and with dynamic marketing campaigns to match) is their influence being overstated, or not?
High profile apps – including the one allowing passengers to book cabs through Uber, for example, pointedly demonstrate how it’s far easier for fintech oriented companies to attract millions of customers to their platforms more quickly, than a typical established institution can – even if it means in Uber’s case the continued haemorrhaging of cash.
As Penry Price, Vice President, Global Marketing Solutions, LinkedIn, has previously said: “Fintech firms are finding success with a customer-centric focus that fills in gaps left by traditional firms. These gaps opened the doors to fintechs.” Yet, he added “Trust in traditional firms remains important to customers.”
Meanwhile, infrastructure-based technology, through platformification and open Application Programming Interfaces (APIs), is already having a profound impact on the financial services industry.
Platformification can best be described as moving towards a business model/platform where the number of participants connecting to it – in order to facilitate business offerings either to one another or for the end customer – is limitless. Or, to put it another way, think of app developer/providers on one side and app users on the other – all congregating on a shared platform for their mutual benefit. Under this ‘network effects’ principle, so the theory goes, the greater the number of participants the more the value of the platform increases for them.
In the banking sphere this means – through collaboration with fintechs – not only an increased focus on the customer, but also that customer’s personal ecosystem. Therefore more value can be gained though better targeting of said customer.
Factor in other developments, such as robotic process automation (RPA), chatbots, and Distributed Ledger Technology (DLT), utilised by cyptocurrencies – and the fintechs should be better suited to reap the benefits than more established organisations, given their greater agility in terms of being able to respond.
The problem is, many fintech start-ups self evidently need scale. And that means many of them will have to get into bed – via partnerships – with major banks if their business model is to be viable.
Further complicating matters, major financial institutions are stealing many of the fintechs’ clothes by enhancing their own customer offerings, but with the added advantage of already having the infrastructure, risk management, access to capital and, most importantly customer trust, that the fintechs don’t have.
In its December 2018 report ‘Synergy and disruption: Ten trends shaping fintech’ McKinsey describes fintechs falling into four broad categories – the first and most high profile type being new entrants, start-ups, and attackers looking to enter financial services by employing new approaches and technologies. While these firms are looking to mimic their more established banking counterparts, the principal issue likely to have an impact here is the cost of customer acquisition.
Another model is the fintech set-up in house by an incumbent institution. Here, the institution makes a significant internal investment in technology in order improve performance and face down competitive threats from the outside.
Alternatively, the bank or similar institution is bypassed by large technology companies offering financial services of their own: both to enhance existing platforms (e.g., AliPay supporting Alibaba’s e-commerce offering) and to monetize current user data or relationships, as McKinsey puts it.
The key takeaway from this particular model is that these organisations have a major customer acquisition cost advantage, relative to other firms.
Finally, fintechs may act as infrastructure providers by providing physical technology and software for institutions, aimed at enhancing machine learning or dealing with cyber risks, for example. Key objectives under this scenario are to improve risk management as well as the customer experience.
Self evidently, banks have their own issues to deal with – not only in terms of retaining customers, but also attracting new ones with improved product offerings.
Unlike fintechs, banks and other financial institutions have historically been hampered by operating in B2B environments, where decision-making processes and sales cycles are inevitably longer. In other words, the complete opposite of disruptive fintechs where getting a concept – via an app – up and running far more quickly, is the norm, rather than the exception.
One consequence of this is that banks can no longer rely on well documented customer inertia, given that while customers historically have been reluctant to switch providers, they are far more demanding nowadays than they once were. User experience now counts for everything – hence gone are the days when clunky websites rendered the mobile app user experience next to useless. Today, most institutions provide full mobile functionality, with or without the underlying technology utilised by fintechs.
This is helped by the fact – as Capgemini noted in its ‘World FinTech Report 2018’ – that financial services customers have greater trust in the brands of traditional firms versus those of fintechs. However, for future success, it adds: “Financial services firms must look to continue aligning with customer goals, maintaining trust, and delivering digital, agile, and efficient processes.” And that of course means either collaboration with outside fintech parties or developing fintech operations ‘in-house’.
Unburdened by legacy systems the report added that fintechs have leveraged new technologies to rapidly respond to customer demands. Indeed more than 90 percent of fintech firms polled said agility and providing an enhanced customer experience were key to maintaining a competitive advantage. Meanwhile, more than 76 percent cited their ability to develop new products and improve existing products and services as critical to success.
Taking the fight to the major banks – in the money transfer space at least – TransferWise and Revolut have been busily signing up small businesses looking to transfer money across borders. Typically these firms have been customers who are attracted by improved service (vs. the banks), meaning cheaper, faster and applying lower fees.
SME business continues to be a mainstay of the major banks however – despite long-standing critics charging the technology is slow (in many cases), outdated and applies fees that are often as high as those placed upon retail customers.
Given the FX payments market saw up to $7 trillion of cross border flows in 2018 (source: McKinsey) it’s self evidently an extremely large pie for the likes of Revolut and their ilk to potentially feast upon.
Touting itself as up to 19x cheaper than PayPal for customers opening a TransferWise for Business account (source: Alderson Consulting (Bristol)), the company has been selling its platform to various entities, including Dutch bank bunq and UK digital bank Monzo.
Moreover, its price comparison tool shows how it measures up against the major banks.
Monzo meanwhile announced earlier this year it was launching its app-based checking account and connected debit card in the U.S. – an initiative in conjunction with incumbent, Sutton Bank.
With the six major UK banks already on its books Monzo’s ‘neobank’ model – namely competing with established banks by offering more user-friendly digital services – has been gaining traction in terms of customer uptake.
The banks haven’t taken this lying down of course and the introduction by SWIFT in 2017 of its initiative aimed at accelerating payment transfer times between parties is an obvious case in point.
But more work needs to be done, since there’s an evident need for banks to plough even more investment into AI-driven risk analytics. It doesn’t require rocket science to conclude that such investment – if targeted correctly – should reduce internal costs and improve services for customers. More likely than not, this will be achieved in collaboration with fintechs, either through partnerships, or by adopting the fintech technology in-house.
In short, the hard reality is that twelve years on from the global banking crisis, margins in the banking sector have been tightening again. For that reason alone customers must remain key. Trust, which has been earned by the banks over the years, needs to be maintained – not least because they may eventually take their business elsewhere as the list of alternative offerings in the financial space continues to grow.