With venture investment in US FinTech companies moving from $3 billion in 2013 to $12.4 billion in 2014, it’s a clear indicator that such start-ups may be eating into the market but the lion’s share of the industry still belongs to top tier banks. Currently in its infancy, the FinTech market is quite fragmented, so many businesses and consumers are choosing services from these new companies to augment their existing “legacy” bank accounts.
At present, banks are relying on customer apathy, and a comparatively large customer base, to retain their market share – after all, few can compete with national, or even state banks in terms of customer base. Despite low operational expenditure and agile business models, banks still hold the advantage over FinTech start-ups when it comes to insight and analysis.
New entrants have a significantly smaller sample-size of customers to test potential product, sales and marketing messages on, making it more difficult to break-away from any niche products/services they may be offering. Conversely, it empowers new entrants to get closer to their customers’ needs than is conceivably possible for a Tier 1 bank. As such, it enables the new entrants to further differentiate themselves and provide best-in-class customer service.
Utilizing the knowledge of their customers, banking institutions are now looking to FinTech start-ups for inspiration not only for product development but for how to provide a better level of customer service. Customers demand access to products and services, including finances, on their terms and the FinTech sector has been more than happy to oblige.
As a result, customers are putting pressure on their bank to broaden their product and service offerings and extend availability to them – a sentiment that banks are well aware of. A recent Fintech Innovation Lab study of financial services executives showed that 56% believed they will have to position themselves to provide as much added-value in their offering as possible. While 4% believe that this will stretch to US banks even offering non-financial services.
Although the shift is moving away from the traditional in-branch model this movement (53 million US customers making mobile transactions in 2014) provides an opportunity for banks to add value to their customers through mobile first strategies - utilizing their existing client base - something new entrants do not possess.
For many customers, “personal finance” means “personal service”, with product bundles and services tailored to their specific needs. Again, existing banks are at an advantage because they have a wealth of big data that they can mine for insight. Taking a cue from the FinTech sector, banks have been going further with their customers; “We’re spending a lot of time with customers to see how we can help them run their business better,” said Dominic Venturo, Chief Innovation Officer for Minneapolis-based U.S. Bancorp.
This direct feedback has enabled banks like Bancorp to create their own innovative, niche offerings. For example, their new MSA Pay app, which allows private and business pilots to pay for fuelling services, was developed as a direct result of customer feedback.
Even the field of small business loans is undergoing re-evaluation as banks try to counter the rise of low-cost, super simple P2P lending. Existing SMB lending is focused on upselling for bank profits, rather than customer needs. Some banks are modifying their approach to lending, using real-time analysis of their borrower’s cash flow to tailor lending options that better suit their needs for instance. Taking this idea further, some firms are now collecting small repayments on a daily basis, helping spread costs and to ensure that the repayments are genuinely affordable. While banks such as JPMorgan and Bank of America have partnered with OnDeck and Viewpost respectively to streamline their services in accessing small business for creditworthiness.
Despite the uncertainty of a sector being disrupted, one thing is certain – incumbent banks cannot afford to continue doing business in the same way they always have done. Banks must position themselves as innovators, or risk losing more market-share to newcomers.
Chase Bank has steadily progressed in its loyalty rankings relative to regional banks by developing a distinctive mobile experience. Providing such services for existing customers not only avoids the threat of disruption but also creates a challenge for regional banks that struggle to match the investment required to lead in mobile.
Banks can realize much greater returns through strategic partnerships with third-party FinTech providers. Building on platforms designed for this purpose, banks can reduce their time-to-market for the new offerings that their customers demand. Banks such as Wells Fargo are creating “start-up accelerators” that supply funding, advice and data in return for access to new products and services that can be used to improve experiences for their own customers, and a stake in the company. This currently takes the form of a semi-annual boot camp for innovators with early stage companies submitting applications to join. Twinned with this is their digital innovation lab, a physical test and learn center to create and evaluate technologies aimed directly at customers. This is extended online, building a “lab” where users can test beta services before fully rolling them out to the market.
The press is full of headlines proclaiming the imminent death of banks. The reality, however, is that a relentless focus on customer needs, and the formation of strategic partnerships to assist with innovation programs means that the future is bright for players in both the FinTech and traditional banking sectors.