How Consumer Sentiment Has Changed the Dynamic of Financial Disruption

“In the U.S., 33 percent of millennials (ages 15–34) believe that within next five years they will not even need a bank”. — McKinsey & Company. Global Payments 2015: A Healthy Industry Confronts Disruption. It is difficult to conceive a reality where banks stand redundant and, while the probability of such a happening is highly unlikely, a large number of individuals globally are adopting a new set of expectations for the infrastructure that supports their pecuniary activities on a p2p, p2b level, e-commerce, or for cross border transactions.​

While the efficiency of different complementary services may not be uniform across all sectors of banking and monetary transactions, with expectations having been established by more modernized sectors such as the payments sector [35% of fintech companies are active in payments sector (McKinsey)], consumers are increasingly putting pressure on banks and other financial institutions to put in place infrastructure that meets these expectations across the board for services like retail banking, availability of information, transparency, fraud detection and compliance (ID verification, KYC, Credit Review).

Consumers are also becoming noticeably more independent when it comes to their financial decisions. Even in terms of advice from financial services firms, they don’t want to talk face to face with an advisor but they want to feel special & have the ability to switch seamlessly between personal and hands-off options. These are no meager demands to place on a traditional bank whose entire infrastructure requires significant investment in data and analytics capabilities (McKinsey) to support these demands. As Eli Broverman, Co-Founder and CEO of Betterment explained “In some cases, investors want to self serve, but they want to self serve in a different way than they have traditionally self served. They want that advice in a digital format.”

While the focus seems to be on convenience, professionals in the sector indicate that the fundamental driver in consumer behavior is, in fact, cost. Jandir Matos, Founder of Gooseberry MX, a business lending platform based in Mexico, says that, “speed and ease of transaction is not a priority over cost. Transferring money, for example, from one friend to another will not go through PayPal if there is a possibility to do it at a lower cost; i.e. other technologies.” Matos further argues that, “users’ expectations are increasing in terms of speed of attention, ease of transaction and pricing; while maintaining security issues. Faster payment processing will be accepted as long as it does not translate into a higher fee or lower quality. Speed in service will not be a priority over quality of service.”

It is in this quality and security that Matos sees the continuity of the physical bank: “People do recognize, as a setback, the time it takes to go to the branch or to use traditional banking channels, however many of them still think that’s the more secure way to do it.”

Digitalization of channels has increased the demand for quality services. A few years ago anything could be solved through a visit to the branch; now that people have a choice in doing so by telephone, chat, mobile banking, so on and so forth, the demand for quality at a lower price is skyrocketing. The financial consumers’ habits have radically switched from a fiduciary relationship with their financial intermediaries to transparency-based engagement. This change has deep implications for the financial sector, as individuals are more in control of their financial decisions and favor highly-specialized, fully transparent service providers.

For the traditional banking institutions, these services continue to be high margin, low efficiency services which create a space for innovative fintech companies to make greater headway in establishing themselves as alternate, credible and cheaper alternatives. And due to their specialized infrastructure and innovative technology, have the ability to provide these services in real time at more affordable prices.

Irfan Khan, CEO of UK based real estate investing portal, Yielders, talks about how it’s no longer about ‘Fin’ but about ‘Fintech’ in addressing how Yielders addresses the demands of clients and partners on providing fast, secure and transparent transacting infrastructure: “Historically there would need to be a settlement office to deal with transactions, not to mention the audit team who would be called in to find any anomalies in the transfers. As the years pass by, the demands from clients increase; the demand for faster, more reliable and secure payments is increasing. Traditional operations of money transfer will not cut it in the new age of FinTech.” Khan points towards three core aspects that they needed to address to stay in the now and relevant: Security, Automation and Reliability.

In fact, today’s consumers increasingly expect their financial firms to offer innovative products, be readily accessible via social media, and deliver a multi-platform experience that measures up. It’s no wonder young financial technology trailblazers are expected to impact over 80% of the traditional firm’s customer base as they democratize finance and provide new investment and advisory solutions. As Bill Sullivan, Head of Global Financial Services Market Intelligence at Capgemini shared, “The challenge is the acceleration of disruption is happening at a faster pace. [Disruptors] are setting expectations higher and they continue to raise the bar day in and day out.”

Essentially, the traditional banking channels are finding it difficult to keep up with the current pace of disruption. It’s a constant race to lower margins and achieve efficiency but a path that requires a degree of risk taking that these institutions are not traditionally accustomed to taking. Fintechs, on the other hand, thrive on this high risk model because that is their ticket to the party, in the absence of scale and brand name.