Ben Robinson looks beyond the hype to see what fintech has achieved in the real world
Fintech has attracted a lot of attention, thanks in part to the enormous sums that have been sucked in from investors – more than $100 billion in the past three years, according to numbers from KPMG and CB Insights. Yet despite all the excitement and cash, and predictions that fintech companies would rout traditional banks, they have so far failed to taken significant business from the incumbents; according to the Economist Intelligence Unit (EIU), fintech companies have grabbed just a 2 per cent market share. Certainly, it is harder to disrupt financial services than many people envisaged. And banks retain many competitive advantages, as well as the ability to innovate. But to write off fintech would be premature.
The fintech revolution?
Banking is a massive industry, making massive profits; McKinsey suggests a figure in the region of $1 trillion.
It is also an industry where customer experience scores are low; fewer than 40 per cent of retail customers would recommend their bank to others, according to Capgemini.
It is, therefore, an industry that should attract lots of new entrants keen to offer better customer service and lower prices and compete away those excess profits.
Historically, banking had very high barriers to entry; new entrants needed expensive IT installations, branch networks to distribute services, a banking licence – and few customers ever switched banks.
But when those entry barriers started to come down – as banking moved online, as IT systems and hardware became cheaper and rentable, as regulators lowered the requirements for banking licences – so new entrants did move into the industry.
Today, there are estimated to be between 5,000 and 20,000 fintech start-ups, offering a wholebrange of banking products and services.
But the impact on banks' market share has so far been limited – and bank leaders seem fairly sanguine about its potential extent. According to a further EIU report, commissioned by Temenos, fewer than 2 per cent of banks in North America see fintech firms as a competitive threat. Mark Tluszcz, co-founder and CEO of Mangrove Capital Partners, writing in the Financial Times in April 2016, said of fintech: "There has been very little innovation and nothing truly transformational".
So was the "revolution" just hype?
For sure, becoming a successful fintech company is hard. The cost of acquiring customers is chief among the challenges; it takes a lot of money to get on the radar of time- and attention-poor consumers and even more to persuade them to change their banking habits. Conversely, only having a small number of products and services to offer gives little opportunity to up- and cross-sell and so spread that high cost of acquisition. This is the challenge facing
companies such as Lending Club (which spends $200 on average to acquire each new customer) and roboadvisors, whose CAC is estimated to be around $300.
Furthermore, a lot of fintech business models are inherently fragile. Take marketplace lending: either the intermediary does not add much value (by acting just as an introducer, for example) or it takes risks for which it lacks the level of funding needed to do what banks do: provide depositors with instant liquidity and no risk.
What's more, banks retain many advantages in the digital world. They continue to score more highly on trust than fintech companies and other potential competitors. They have the compliance know-how and banking licence. They have the customers. They have access to capital.
They also have data. One of the big themes at this year's Temenos Community Forum is artificial intelligence. But what many people overlook about AI is that, while the algorithms are important, it is the data that really counts. The best machinelearning AI will be the one that is given the largest data sets to learn from. And this, for now, hands banks another advantage.
Banks still have the ability to innovate and reinvent. As we will also discuss at the conference, one of the quickest and most successful ways for them to transform themselves into digital banks is to start a new bank (free of legacy IT, processes and culture) to which they can migrate existing business over time. Temenos customers EQ Bank (from Equitable), Pepper (from Leumi) and BforBank (from Crédit Agricole) are all good examples of this.
It would be remiss not to point out that banks face issues of their own. Traditional banking cultures, for example, will struggle to adapt to a digital world in which the bank analyses, rather than locks down, customer information and one in which the bank potentially offers third-party products and services. Also, more apt for discussion at TCF, legacy systems will have to be replaced if bank services are to be scaled to meet the demands of a digital world of instant information, personalised offers and micro payments.
Add cultural challenges to those of IT and this explains why banks are typically so slow to innovate. To illustrate this, consider how on average Facebook issues two new versions of its platform every day and Google produces more than 130 updates over the same short period. At present rates of renewal, banks are putting a new version of their core banking software into production every 50 years.
One obvious remedy to solve both banks' and fintech companies' issues is for the parties to work together. Banks need access to greater levels of innovation while fintech companies need cheaper customer acquisition costs, compliance and capital.
One example of an excellent partnership lies in the collaboration between Commercial Bank of Africa, a Temenos customer, with M-Pesa to launch the M-Shwari mobile banking service. Launched in just 5 months, the service went from zero accounts to 26.2 million in five years across Kenya, Tanzania, Uganda and Rwanda. It is launching in Ivory Coast later this year.
Banks are starting to realise the potential upside to partnering with fintech companies. In a survey by Capgemini, two-thirds of banks are now actively seeking partnerships. And this is why Temenos set up its MarketPlace, to provide a platform for banks and fintechs to transact with each other. The agenda is full of examples of fintechs getting together with banks, such as Bank of Ireland's collaboration with Xtremepush to improve sales conversion rates on digital channels.
The desire for banks to work with fintech companies is why we hold the global Innovation Jam competition, to help our customers find the most interesting fintech companies. The Innovation Jam final will be live-streamed from Lisbon on 28 April.
Too early to call time
If banks are not already considering fintech partnerships, they should be. The European Payment Services Directive 2 – or PSD2 – is likely to usher in a new era of open banking and is another hot topic at this year's conference. It would Canutelike not to consider how open banking will bring about radical change. To our minds, PSD2 promises to do to banking what smartphones have done to the taxi industry. Technology lowered barriers to entry, but it is regulation that will make banking truly online addressable.
With the boost that PSD2 could give to the fintech industry, by allowing fintechs to aggregate customers' banks accounts and initiate payments on banks' systems via APIs, it would be too early to say that fintech won't revolutionise banking.
In addition, we should also point out the following: that despite only taking 2 per cent market share, some very successful fintech companies have been born; that fintech models continue to evolve, expanding product offerings as well as pushing into middle and back office; and, lastly, that the indirect effects of fintech have been much greater – in lowering bank spreads, introducing new products and raising customer service levels.
So away from the hype, fintech is delivering real change – so far mostly indirectly – by forcing banks to raise their game. The revolution hasn't happened yet, but with PSD2 an earthquake may be coming. The banks' best bet is to bring fintech companies into the tent; not to compete but to collaborate. To make real-world change together.