How Much of the Financial Services Market Is Really Under Threat From FinTech

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The disruption (threat from FinTech)

A Goldman Sachs research report in early 2015 estimated that a part of the traditional financial services’ revenue ($4.7 trillion out of $13.7 trillion) is at risk of being displaced by new technology-enabled entrants which include FinTech players lending, wealth management, payments and others. The threat of FinTech is more real than before.

McKinsey’s report The Fight for the Customer: Global Banking Annual Review 2015 reveals that as much as 40% of revenues and up to 60% of the profits in retail banking businesses — consumer finance, mortgages, small-business lending, retail payments and wealth management — are at risk from a combination of various factors such as dwindling margins and competition from FinTech startups which target origination and sales, the customer-facing side of the bank.

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According to a recent research report published in March 2016 by PricewaterhouseCoopers (PWC) titled How FinTech is Shaping Financial Services, top banking executives fear that more than more than 20% of the financial servicesbusinesses will be at risk to FinTechs by 2020. If we look closely into the PWC report, the majority of the participants in the survey feel consumer banking & fund transfer and payments as the sectors mostly likely to be disrupted by 2020. The PWC report also reveals that disruption is expected in the asset management and insurance sectors.

Reasons behind this disruption

– Cost and quality of delivering financial services: FinTech players are looking to cut costs for customers and improve the quality of financial services as they don’t carry the burden of regulations & branch networks and their expenses are low. Examples: Lending Club’s ongoing expenses as a percentage of the outstanding loan balance is about 2% when compared to conventional lenders’ 5–7%. Close to 50% of the loan applications Funding Circle gets from small businesses are received outside its working hours. Transferwise is less expensive compared to banks for sending money across borders.

– Consumer experience: FinTech startups have realized that dividing banking services into separate segments and specializing at least one of them is the best way to ensure maximum customer satisfaction and provide best consumer experience. For example, Betterment, a robot-advisor firm offers clients a goal-based approach; most of its customers have several targeted accounts from retirement funds or deposit for a house, with specific investment portfolios. To create the best customer experience, Betterment provides an integrated advice which is updated in real time. Robinhood, a FinTech startup became the first financial app to receive an Apple Design Award which enhances the way people view and interact with their investments.

– Innovative ways of assessing risk: FinTech startups such as Kabbage and One Deck leverage information which includes social media reviews to evaluate how small businesses are doing. Avant uses machine learning to underwrite consumers whose credit scores were hit during the financial crisis. Data-driven and algorithmic decision-making has clear advantages over decisions based on credit scores or meetings between banks/financial institutions and clients.

–“Millennial” effect: Millennial preference for the best customer experience, speed and convenience will accelerate the adoption of FinTech Solutions.

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