The next FinTech Chapter – current observations on the FinTech market
Many people think of FinTech as a new hip trend. The reality, however, is that FinTech is maturing. The times when FinTech was only a fancy app are over, making it much more than just a nice customer frontend. Consequently, business models in the FinTech industry are moving away from the (retail) consumer interface towards innovation that includes the backend and solutions that are focused on corporate customers. One indicator observed is the increase of issued banking licenses to emerging players, such as solarisBank (see here) and N26 (see here). Another observable sign of maturity in the FinTech sector is the collaboration between banks and FinTechs which has increased significantly in the last months, counting the plenty press releases. For example, the FinTech FinReach is currently successfully collaborating with over one hundred banks in Germany (see here) while, for example, the startup Scalable Capital has agreed upon a collaboration with industry giant Siemens to provide FinTech services as an employee benefit (see here). At the same time, as FinTechs mature, the innovation of technology is accelerating at ever-increasing speeds. For instance, the adoption and customer acceptance of chat technologies and artificial intelligence reaches new highs. All this shows that the next generation is knocking on the door. Already today, Amazon’s Alexa gives us a first good glimpse at how the future may look like with voice recognition. And the large tech companies such as Facebook and Google are pushing technologies quickly forward, accelerating their development even further. But this is not only future. Examples of their adoption can be already found in the FinTech industry: For example the InsurTech Clark, a digital insurance broker, has build its own robo-advisor that suggests automatic improvements from an existing insurance portfolio with high customer satisfaction ratings (see here).
So what is the implication of those developments for the next generation of FinTechs and how will FinTechs evolve?
Looking across the different segments of FinTech, we observed over the last months in particular trends in the retail segment, in offerings for SMEs (small medium enterprises) and in the backend operations.
The emergence of retail FinTech platforms
On the customer side, demand for apps has been dropping significantly with the average user having approximately 25 apps installed but spending more than 85% of his or her time with just 5 apps according to reports by Google and comScore. Thus, many FinTechs continue not only to face the challenge of high customer acquisition cost but also will see mobile as an increasingly challenging customer acquisition channel. Building a lasting customer relationship with a broader offering than a “one FinTech product strategy” will be key going forward. With that, strong brands and platform offerings will become even more important than in the past. The “Uber of finance” to solve this quest has not yet emerged, but first pioneers are already here to address the challenge. Both incumbent players like Deutsche Bank as well as emerging players like N26 have began building consumer platforms. And we expect many more to come.
The Rise of SME FinTechs
While a large progress has been made in digitizing retail banking, corporate banking is still lagging behind. Established banks typically serve only five to ten percent of companies in their portfolio effectively, which points straight to the key implication for this segment: SME banking solutions have to be rethought. Currently, only one-third of businesses are happy with corporate online banking platforms while only a fourth are satisfied with the mobile solutions offered according to the EY Global Commercial Banking Survey from 2015. Whilst new B2B business models have picked up in 2016, with prominent examples like the digital debt collection service Pair Finance, the factoring service BillFront, optiopay and many more providing services for small to medium enterprises (SME), the space bears many unsolved challenges. Hereby, technology brings a massive potential for the digitization of this segment, offering the same solutions that are available to large players and to smaller ones. The possibility of increased levels of digital self service that comes with that development will digitize the core financial processes for SMEs such as treasury. Furthermore, technology will allow more integrated views on a SME’s financial well-being providing the opportunity for true digital advice to the mass at an efficient cost base.
The Revolution in the Backend and Operations
More and more use cases of implementing state-of-the-art technologies in the the backend and operations are currently emerging and will even increase in the coming months. Good examples for this are already Monzo, which is developing its own core banking system, or ThoughtMachine, which is developing with its VaultOS a new “operating system for banks”. These developments allow not only for significant cost savings in the backend but also enable tangible customer benefits such as true 24/7 availability, broadened self-service capabilities and near-realtime transactions, to name a few. With their application, the entire banking paradigm can be rethought – think alone about the potential of use cases of blockchain. Similarly, this allows an efficient implementation of regulations. First examples in the “RegTech segment” are Percentile, Trulioo or FundApps. Moreover, the application of those technologies to key operations processes can be a stepchange. Think, for example, of what chat technologies and machine learning can do to customer care. The experience could be completely rethought removing long waiting times on the phone and providing immediate, context sensitive support through automation of a large amount of the customer requests.
With those trends, expertise has become even more crucial than ever to sustainably build new FinTechs. The industry is no longer about building a nice mobile app that a skilled programmer can do within days. A successful FinTech doesn’t need only high-qualified tech skills, but also experienced talents from the industry, combined with a high entrepreneurial spirit. At the Berlin-based company builder FinLeap, for example, the average age of employees is slightly above 35 – significantly older when compared to other startups. The reason behind this fact is that FinLeap’s aim is not to hire the best young professionals aspiring to build shape the future, but also the best experts in each field from top level bankers to managers.
Consequently, FinTech has transformed into a space where next to entrepreneurial skills financial, technological and especially regulatory expertise are very important assets to keep up with the quick developments in order to sustainably reshape finance.