Last editedMar 20218 min read
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.”