Over the last decade, a generation of fintechs have emerged to challenge traditional financial service providers – and, equally, spur them into new innovation.
Technology has served to reduce the cost of developing financial products and services. Disintermediation and fragmentation have put power in the hands of the consumer, giving customers more choice than ever. And everything from global austerity to the data-driven mindset of the millennial generation has kept personal finance high on the customer agenda.
All of these trends have supported fintechs who deftly use rapidly advancing technology to offer innovative products, better customer insight and superior user experiences.
Their success is well documented. Global fintech investment hit a record $111bn in 2018. In Europe alone, 536 deals raised $34.2bn. There are now thought to be around 1600 fintech companies in the UK, most of them concentrated in London.
In 2019, most of the obvious gaps in the market have been filled. New fintech startup activity actually peaked in 2014 and has been on a gentle downward trajectory ever since. Today, the average UK fintech has been around for just over five years, which suggests a good product and a proven niche. The challenge in 2019 is to scale.
And scaling is a significant challenge. That’s true for all startups; but especially for fintechs, who face a strict regulatory environment and - often – large, well resourced, long-established incumbents. Some issues are obvious: keeping costs under control, finding the right talent - but others are more obscure. Here, we will discuss some of the more unexpected challenges every fintech will face as it transitions from startup to grown up, while offering a practical steer on how they might best be met.
“Like most other sectors, fintechs have realised that starting-up is relatively easy compared to scaling-up. Scaling-up requires particular strategies, approaches and capabilities from the outset.” Sudhir Pai, CTO Financial Services Strategic Business Unit, Capgemini
1. Combating inertia
“Something is wrong when 20 million potential customers carry on as they were, while we meet in conference venues and high-end coffee shops and agree how revolutionary we are.” - Anne Boden, CEO Starling Bank
You have a great product. People who try it, love it. You are the toast of the early adopter crowd. That’s great, but it’s not nearly enough.
Customer inertia is a frustratingly real phenomenon in financial services. Public trust in the financial services sector remains low, but that doesn’t mean either consumers or small businesses will readily change financial habits that have been hard-baked over many years. According to one major report, financial services customers still have more trust in the brands of traditional firms than those of fintechs, despite ‘2009 and all that’.
Take retail banking as an example. In 2013 the Current Account Switch Service (CASS) was established, making it easier to move accounts. By September 2016 there had been three million successful switches, which amounts to less than 5% of the possible total across three years.
Beyond easy wins
What can be done? Well, whether they target consumers or businesses, fintech startups looking to grow must escape the London bubble; and become as relevant in Salford and Swindon (and maybe Stockholm), as they are in Shoreditch. London is a big city with a large cohort of digital natives. But startups looking to scale need to look beyond the easy wins.
Anne Boden, CEO of Starling Bank, thinks that fintechs “need to understand the views and preferences of those unimpressed by our rhetoric, who do not want to join our exclusive club.”
One report also says that fintech companies set too much store by user experience when it comes to persuading ‘ordinary’ customers to switch. In tests, customers really do prefer the experience offered by a challenger bank to that of a high street incumbent - but they stick with the incumbent anyway.
Instead, breaking through the “bank first” mentality may take a combination of excellent customer experience and personalised services, informed by big data. It will take innovative marketing. And while the online-only model may be attractive to early adopters, it can turn mainstream consumers off. Challengers can turn a negative to a positive by using their lean business model to offer concrete benefits, like cheaper services or better interest rates.
We know it can be done: Samir Desai, CEO of peer-to-peer lender Funding Circle, said: “Raising awareness and getting people to forgo a cultural norm of thinking ‘bank first’ was always the main challenge. However, this is changing and small businesses now tell us they prefer (our) approach to access finance.”
2. Incumbents won’t stand still
“With fintech challengers taking a greater slice of the market share...we’re seeing banks take big steps to get themselves back in the game. Goldman Sachs released (digital savings product) Marcus and RBS launched (digital only business account) Mettle.” - David M. Brear, CEO, 11:FS
Here’s another reason you need to work hard to combat customer inertia. Incumbents are working just as hard to make sure customers stay right where they are.
In fact, the traditional players are going on the attack. RBS chief executive Ross McEwan has said that the bank has six standalone digital units in development, including one designed to compete directly with challengers like Monzo. Meanwhile, Spanish banking giant Santander became the first international bank to launch a cross-border payments system based on blockchain.
When their legacy systems make ground-up innovation tricky, incumbents are buying up fintech expertise or partnering with it. Another Spanish giant, BBVA, has acquired Atom Bank in the UK. A survey by law firm DLA Piper found that 29% of financial services companies planned to engage with fintechs in some way, while a further 19% planned to invest in them.
Exploit natural advantages
Incumbents have the money and customers, so how can fintechs fight back against the fight back? Some might not want to. The World FinTech Report 2018 found that “fintechs are increasingly looking to symbiotic collaboration with the traditional financial services firms they once sought to overthrow.”
Nevertheless, the same report revealed that fintechs are confident in their own abilities, with more than 90% saying that agility and providing an enhanced customer experience were key to their competitive advantage.
Incumbents may be investing in fintech, but digital upstarts do not have to patch new technology and agile ways of working onto legacy systems and processes. Innovation is in their DNA. Nimble fintechs also collaborate, creating a network of independent businesses covering a raft of financial services.
The original advantage – that the giants are asleep – is now gone forever. But fintechs can continue to be agile, cutting edge, collaborative and flexible. The fintech model has also unlocked innumerable niches which are less attractive to traditional institutions, but still represent viable businesses for those not burdened by legacy systems.
“If banks are starting to shift and change their products off the back of what we’re doing, that in itself is not a bad thing. However...we still believe that we’re 10 times cheaper or faster or more convenient than what the banks can offer.” - Matt Briers, CFO, TransferWise
3. Taking payments consistently as you grow
One secret to cost-effective scaling is the increasing automation of routine customer interactions. That’s true of marketing, sales and technical support. It’s also true of finance. One thing fintechs need to remember is that, as they scale, their payment systems need to scale as well.
The alternative is late and missed payments, the increased potential for fraud, and ever-present cash flow issues. According to the Federation of Small Businesses (FSB), SMEs are owed on average £6,142, mostly by larger firms not paying them for goods and services on time. Over two-thirds of small businesses have run into cash flow difficulties as a result.
At the same time, recent figures from BACS show the cost of recovering overdue money rising to an average of £9,000 per business. Small business growth is being stunted by inefficient payment processes and late paying customers.
But it’s not just SMEs. Compared to their consumer equivalent, B2B payments of all sizes are stuck in a slow and cumbersome past. Over half of all B2B payments are still done via some form of bank transfer, a ‘push’ method of payment which is labour intensive and puts control entirely in the hands of the paying party. Worse still, nearly half of all global business transactions are actually done on paper. These outdated methods can lead to a high level of failed payments, a lot of wasted time and some difficult conversations with valuable customers.
It’s no wonder that 82% of all businesses suffer from poor cash flow at some point, regardless of size or stage of development.
Automate to accumulate
For that reason, automation is vital. Businesses who utilise bank reconciliation automation, for example, significantly reduce their payment problems. GoCardless research has found that 84% of UK SMEs using GoCardless spent less time chasing invoices, and 74% spent less time on reconciliation. GoCardless uses Direct Debit to automate the payment process, meaning growing fintechs get paid on time, in full; and avoid the time- and spirit-sapping drudge of chasing unpaid invoices. The solution scales with the business.
Growing fintechs need slick financial processes, or they risk losing money. According to one report, 79% of businesses of all sizes are in the process of digitally transforming their finance departments with technologies like holistic payments and artificial intelligence. Payment process automation is easy to implement and a key driver of efficiency as fintechs look to scale.
“Our simple message to small businesses is: if you use GoCardless, you’re going to get paid on time every time. It’s a key factor for any business.” - Carlos Gonzalez-Cadenas, Chief Product and Technology Officer, Go Cardless
4. Staying lean as you get bigger
“If you have belief and conviction that what you are building is a great product and that the opportunity is big enough, then why wouldn’t you invest to the full extent of your ability to capture that?” - Gary Turner, Managing Director and co-founder, Xero UK
The UK fintech sector generates over £20 billion in annual revenue and raised investment of £16 billion in 2018 alone. It is a boom time for fintech business and firms are unveiling ambitious plans for growth. As Gary Turner says, why wouldn’t they?
The challenge is to get fat while staying lean: growing the business without losing the innovation, agility and responsiveness that made it such an attractive proposition in the first place.
Part of the solution is technological, of course. You can’t have a personal relationship with every customer any more, but you can use sophisticated CRM software and AI-powered chatbots to make customer service fast, responsive and satisfying. In fact, you can automate a range of processes - from invoicing to appointment scheduling - to free up time and do more with less.
For example, Meri Williams, CTO of challenger bank Monzo, has described how the company uses collaboration software Slack to encourage lean, rapid decision making, with an idea often travelling from proposal to agreement in less than 24 hours. “If someone says, ‘I propose we do this,’ and you have ten thumbs-up (on Slack) and one ‘I’ve got a question’, and nobody’s saying no, you can deal with the question in the moment...then you’re good to go.”
“Use technology to stay connected with customers, and make sure you are delivering the solutions they want and need rather than becoming complacent. The advantage fintechs have over incumbent banks is that technology is woven into the company’s DNA from day one, enabling them to embrace new concepts quickly and implement them easily.” - Mark Walker, COO, the Fintech Power 50
Work smart, stay lean
While technology is important, it’s also vital to get the human element right. As fintechs scale, teams quickly grow beyond the core of disciples that have been there from the beginning. It’s crucial that you recruit people who share your ethos and deploy them wisely.
In the beginning, your small team worked on everything together. It made experimentation and implementation easy. That speed and agility is one of the main advantages fintechs have over traditional rivals and retaining it is essential. Monzo divides its now 300 plus workforce into cross-functional, decoupled teams, each with a high degree of responsibility and autonomy. Each team can react to threats or push out product updates with a speed that traditional corporates can’t match.
That’s one pragmatic way of working lean in a growing business. There are others, like outsourcing secondary tasks and processes to maintain a singular focus on core operations. But staying lean is as much a psychological challenge as a practical one. Founders need to be prepared to take a step back, relinquish day-to-day control, and trust others the details while they concentrate on the big picture. All good founders need to step outside the day-to-day and find the space to identify inefficiencies or spot new opportunities – to stay disruptive. In fintech, this ability to question the status quo and envision future customer need is essential; it practically defines the sector.
We are nowhere near “peak fintech”. Key trends for 2019 alone include: the continued digital transformation of traditional financial services providers, the algorithmic or even AI-driven assessment of consumer credit and product applicability, and regulators in many territories catching up with fintech trends – in some cases for better, in others for worse.
These trends show that the engine of innovation is still strong, and many more startups will come to market in the next 18 months with genuinely disruptive propositions. But scaling will still be a key challenge.
Getting the word out in an increasingly complex market always requires hard work. Achieving scale with the inertia characteristic of financial services, an often fragmented and expensive regulatory environment, plus well-resourced traditional giants, really keeps the pressure on.
The solution hasn’t changed, though: agility, operational efficiency and automation, leanness and responsiveness remain the currency of fintech success.