Watch the FinTechs, and learn: Why new competition is a good thing for FS
24 August 2016
Are FinTech companies a threat or an opportunity for the financial services (FS) sector? Most of the time, the opinion seems to fall into the ‘threat’ camp – that these innovative small companies are so agile and disruptive that they will slowly chip away at the market share of large, traditional banks and insurance companies. Sometimes you hear talk of ants taking on elephants – an outrageous mismatch in terms of size and strength, but allow the ants to eat away at the elephant unchallenged for a while and it’s a very different story.
But is this really a fight? True, some processes that have been bread and butter for established FS firms are under attack from FinTechs – the international payments system, for example. But what we’re really seeing, I think, is a battle for resources, rather than a fight to the death. The big predators are looking to retain customers; the smaller predators are looking to grow. In other words, this isn’t necessarily a zero-sum game where one species becomes extinct.
That’s why I see FinTechs as a great opportunity for established FS institutions, rather than a threat. The average FinTech doesn’t set out with the ambition to take down a large bank or insurer – rather, they think they can offer the same service(s) in a superior way to the existing market, and, in doing so, they hope to gain market share. This is competition at its purest.
And why is that? It’s because they do one essential thing far better than established firms, and that’s the customer experience. Whether it’s customer service, price or efficiency, FinTechs are pushing the boundaries of the use of digital technology to deliver financial services: You’ve lost your bank card? Cancel it in one tap through your challenger bank’s App. Want to get insured on your mate’s car for a few hours driving on holiday? There’s an InsurTech for that. Sick of carrying all those different payment cards? Why not try that new payments startup. Can’t understand why you need to go to a branch with your passport and a paper bill to open an account? That new RegTech startup removes the need. You want to improve your fitness and reduce your health insurance premiums at the same time? No problem – there’s an App for that too. The list goes on.
That’s why established firms can and should be learning from the FinTechs – because they’re asking all the right questions about what people want from Financial Services. What are they doing for their customers that works? What do people like? Why are they prepared to use many different services instead of just one provider? There are many lessons to be learned from the emergence of these new competitors. FS institutions have spent billions trying to transform themselves, and nearly all have set up an innovation arm or venture capital fund, but, crucially, the evolution of the customer experience is still glacial in its pace. We expect huge levels of digital convenience in most walks of life, but we’re still waiting for much of the FS sector to catch up. We have Apps on our phones that can answer any question we might have, book us tickets, choose a restaurant for dinner, order our coffee and even find us a date. But with big banks and insurers, it’s another story. Our banks and insurance companies arguably have access to more detailed, personal data about us than anyone else, and yet the insights they’re able to offer us are rudimentary or non-existent.
Incumbents still have a big advantage for the time being, in the shape of customer inertia. But the tide of momentum appears to be turning against them, as switching statistics continue to tick upwards. At the same time, this unprecedented period of low interest rates makes competing on price extremely difficult, and pointless in some ways (is 0.5% difference going to persuade anyone to switch?). In order to retain (and grow) their customer bases, FS institutions need to refocus on what the customer wants, needs and expects – and there is an awful lot they can learn from these new competitors. Sooner or later, people are going to demand a better digital customer service from their FS providers, and if the big firms aren’t ready to offer them that, you can bet the FinTechs will be. There is everything to play for.
Read more about how Banks can collaborate with FinTechs here.