Fintechs are great at creating superior digital offerings and piloting new user-centric monetisation models. In doing so, they definitely pressured the incumbents not to rest on their laurels, which ultimately benefits all end-customers.
Incumbents and fintechs don’t compete on fees or features. They compete against better ways of serving customers, enabled by the now available tech stacks and business models. Customer-centricity is the ultimate benchmark.
The fintechification of everything and how banks might become the most loved institutions
a16z: Banking on the Future: Why our most hated institutions will become our most beloved
Forbes: Fintech: The Fourth Platform
Financial Times: Cache crunch, Google-Citi deal could be future of banking (€)
Angela Strange of a16z explained how technology enables new fintechs to be founded and incumbent banks to better serve customer needs:
“(…) what if software could address these hard, structural problems, enabling even non-fintech companies to provide financial services for their customers? What if, as a result, people didn’t just put up with, but actually love, their banks?”
In the article, the key technological trends at play are:
- API-enabled, modularised services allowing for outsourcing and fast deployment
- New online distribution channels and acquisition loops bring down customer acquisition costs
- More and better data available
Very similar to Robert Armstrong’s view in the Financial Times article (€), exactly these trends power big (tech) brands to seize new revenue and data opportunities from banking plays:
“Fundamentally, a bank is a balance sheet, a data-processing system and a sales force. Silicon Valley companies may be content to leave the balance sheet, the most heavily regulated bit, to the banks. But they are coming for the other parts.”
These developments will ultimately lead to a change in distribution power, as any brand can become a bank. Banking-as-a-service lowers the barriers to entry by making adding banking-like services as easy as connecting to an API (quoting from a16z):
“(…) the next era of financial services will come from seemingly unexpected places. Just as Amazon Web Services dramatically lowered the cost and complexity of launching a software business, unleashing thousands of new companies, the “AWS for fintech” stage has arrived in banking.”
Matthew Harris of Bain Capital Ventures posted a similar hypothesis on fintech as the fourth major platform technology:
“(…)we’re turning our attention to investing in companies that use financial technology as an ingredient versus a primary business model.
We’ve already been trained to conduct financial transactions inside of software applications (think payments inside of Uber), so if you’re utilizing software to run your business, using that same software to get paid and make payments is logical and more natural than going to your financial institution to do so. These relationships are data-rich, which leads to smarter cross-sell, prequalification and massive risk reduction. The monetization opportunities are not only large, but actually meaningfully larger than the original software opportunity.”
This leaves a few strategic implications for incumbent players:
- Make a hard pivot to become a product factory
- Compete against the vast amount of consumer/B2B brands (that employ the best digital talent, have vast proprietary data, can offer frictionless and convenient CX) that will integrate financial services into their own offerings over the next decade
- Build a position as the trustworthy, neutral financial health provider. Incumbents can now take a stance against all brands that clearly only move into banking to push customers towards their core business and squeeze more revenue out of them (either by using their data or producing lock-in effects)
Want to peek into the future of fintech? Have a look at China
NYT Magazine: China’s Internet Is Flowering
Nothing new, but China is home of one the most successful fintech ecosystems. NYT Magazine wrote a nice overview of China’s internet economy. There are many adjacencies that might give some inspiration about how banking can evolve in the West, in adapted versions:
“Chan could have created a regular mobile app, but the integration with WeChat Pay, the platform’s mobile payment service, made billing easy, and most important, customers were already there.
All of them are drawn in by the gravitational pull of WeChat’s enormous number of users and its standardized software infrastructure. It resembles the European Union in the way it has evolved into a market ecosystem: Miniprogram developers benefit from a common currency (WeChat’s mobile payment system), an identification system (WeChat’s login and password) and greatly lowered barriers to trade and movement (easy integration with any number of other services on WeChat).”
After Libra is falling apart, EU regulators might launch their own version
Reuters: Work on ECB digital currency under way, progress possible next year
Financial Times: ECB explores development of a digital currency
The ECB is working on its on digital currency as an alternative to Facebook’s Libra and other private projects, aiming to reduce costs of international transactions. The announcement of Libra was a wake-up call to the ECB – if Libra will finally be launched and succeed, it might end up being successfully adopted as it meets customers needs for a digital currency as an alternative to cash.
“The ECB official said several options were being studied. Under the most ambitious plan, users of the new digital coin could open bank accounts directly at the ECB. That would cut transaction costs but would make existing banks and payment services largely redundant.”
Has the market reached peak fintech? Funding in Q3’19 topped $8.9B
CB Insights: Global Fintech Report Q3 2019
CB Insights released their recurring report on the current state of fintech:
“2019 global fintech funding topped $24.6B through Q3’19, already surpassing 2017’s total.”