Fintechs: transforming customer expectations and disrupting finance

Expect to see greater collaboration, rather than cut-throat competition, among traditional financial services and fast-paced Fintechs, to the benefit of the industry and its customers.

Today, customers are used to having digital services at their fingertips 24/7, with unparalleled flexibility in managing their finances, promising access anywhere, anytime. In 2019, more people in the UK managed their bank accounts on mobile apps than through internet banking. Across the pond, 71% of all banking interactions are now digital or online, compared to just 6% happening in a branch. The COVID-19 pandemic saw consumers become increasingly comfortable with digital ways to pay for goods and services, as a necessity rather than a personal preference.

This fundamental change in customer expectations of the way financial services operate would not have happened were it not for the wave of innovation from Fintech and Insurtech start-ups over the last few years. Today, the likes of Monzo, Revolut and Zego, are household names, having shaken up the processes and services within their sectors to the point where established players are feeling the pressure. As Fintechs take an increasing share of their core revenues, incumbents are now playing a catch-up game, with massive spending on their technological upgrades and better customer experience. The likely outcome? Increasing innovation, more collaboration and “co-opetition”, alongside better service and experiences for the customer.

Getting closer to the customer

Over the last couple of years, the financial services industry has shifted from a product-centric to a customer-centric approach. Firms are increasing their focus on instant, dynamic interactions, giving the sector the flexibility to respond to fast-changing consumer needs.

For example, while traditionally insurers were in contact with clients only once or twice a year (usually when a claim is made or policy renewed or cancelled), new consumer applications will likely emerge that give on-demand access to your insurance profile. Insurers will leverage these innovations to personalise plans. For instance, they could introduce insurance discounts for those regularly exercising based on tracking data from a customer’s health monitoring app.

And this more personalised digital experience is not just about reaching Millennials and Gen Z. Accenture’s research into consumer shopping habits points out, “Millennials are not only transforming their own shopping behaviors but those of their parents, who are increasingly mimicking the demands of their children for seamlessness as they climb the digital learning curve.”

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Why have Fintechs been able to race ahead?

With favourable tech regulation, massive mobile adoption, and shifting expectations across the demographics, digital challengers are well positioned to advance and evolve the personalised services they offer.

Fintechs have the advantage of starting from scratch, without having to build on legacy IT infrastructure bureaucratic decision-making processes. They are lean and innovative, led by entrepreneurs on a mission to change the world. Using the latest technologies such as Artificial Intelligence (AI), Blockchain, Biometrics Security and Cloud, the processes, compliance requirements, policies and technology differ from conventional banks, providing lower operating and resource costs. With these foundations, they are well-positioned to pursue a highly customer-centric approach and rapid product innovation.

By contrast, for traditional banks it can be an arduous task to innovate and reinvent. They are highly bureaucratic and slow-moving, with high-cost structures and substantial legacy tech. These characteristics prevent them from flexibly adapting to fast-changing consumer expectations. Service providers unable to live up to the expectations of best-in-class digital experiences will see high switching rates. As a result, providers are actively investing in initiatives that boost customer experience in a bid to increase long-term customer retention.

Traditional banks are still in the game

The ace in the pack for traditional banks and financial services companies is that they offer clients trust and familiarity. Most traditional banks have long-standing relationships with their customers. It is interesting to note that the decline of bank branch visitors is modest – just 1-1.5% – with digital channels supplementing the customer experience, rather than replacing it. This is difficult for Fintechs to replicate. They are younger and their cost structure prohibits them from building out at-scale physical infrastructure.

Additionally, traditional banks currently offer greater breadth and depth of services than digital challengers, who are often limited to one or two core services. Naturally, these behemoths of banking are playing the long game, with the infrastructure in place to ensure they can keep investing in their future. Perhaps unsurprisingly, over the next few years, 77% of incumbent financial institutions intend to keep increasing their focus on internal innovations to boost customer retention.

The reality is that customers will often use both traditional services and Fintechs in parallel. Generally, customers will use digital challengers for light-touch services, while reverting to incumbents for more sophisticated services. For example, many millennials use a challenger bank to manage their finances on a day-to-day basis but will revert to a traditional bank to take out a mortgage. Similarly, we’re increasingly seeing digital challengers own consumer-facing interactions, while traditional incumbents provide the back-end infrastructure. While consumers buy insurance policies from digital brokers, a conventional insurer will often underwrite their policy.

It’s about collaboration as well as competition

The reality is that traditional financial outfits and Fintech start-ups would be smart to increase cooperation as they have highly complementary skill sets that, if shared, would leave both parties better off. Instead of a traditional bank re-developing their mobile banking application in-house, they could leverage the help of digital challengers, whose design-led, consumer-centric skillset is far more suited to this. By acquiring or partnering with fintech firms they can fast track Banking-As-Service (BaaS) or open banking services. Similarly, digital brokers do well to have their products underwritten by incumbent insurers, as they don’t have the infrastructure or capital to do this themselves.

In the future, it’s safe to say that both Fintechs and traditional banks will play a significant role in shaping the future of banking and other financial services. However, Fintechs will likely continue to eat their way into core banking activities, leaving incumbents to take on a custodial role for cash and securities, unless greater synergies can be found between the two worlds. By doubling-down on individual strengths in-house and actively pursuing partnership opportunities in areas of weakness, this more collaborative, supportive approach will accelerate progress across the entire industry, bringing advantages to traditional banks, digital challengers and customers themselves.

Written by Pierre F. Suhrcke, Venture Partner, TempoCap

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