Today, we see disruption everywhere, just to mention Uber, AirBnb or Netflix. Banks however, for a long time, were considered as opaque, complicated and heavily regulated system, which could not be understood by normal mortals outside of the industry.
The things started slowly changing with an emergence of the new trend in finance, employing state-of-the-art technologies – in short FinTech (Financial Technology). The National Digital Research Centre defines it as “innovation in financial services”.
But what does that actually mean?
FinTech startup companies started to unbundle the traditional banks offering by taking one specific service at a time, be it wealth management, retail trading, P2P lending or international money transfers. The same goal is shared by the FinTech players – by employing cutting-edge technologies they want to make financial systems more efficient, while making profits (Medium, 2015).
Markets responded positively to the shift in financial industry, which is proven by the emergence of first “unicorns” (companies valued at more than $1 billion) in FinTech, like TransferWise, Square or P2P Chinese gigantic lender Lufax, who was valued in a January 2016 fundraising round at $18.5 billion (Business Insider, 2016). Having worked last year in the challenger bank, N26, I took part in the Series B funding when Hong Kong based Horizon Ventures VC backed the German Fintech with $40 million (N26, 2016). According to the KPMG analysis, just in the Q2 of 2016, investments in FinTech totaled $9.4 billion (KMPG, 2016).
How do the traditional players defend themselves against the entire FinTech craze?
According to the rule that says “if you’re specialized in everything, you’re specialized in nothing”, the old banks, dragged down by their IT legacy costs and heavy bureaucratic systems, have troubles to swiftly reorganize and respond to the threat. As McKinsey experts predict, banks could lose up to 60% of their retail profits to FinTech companies in the next 10 years (The Globe and Mail, 2015). Some banks decide to fight the trend, some try to merge with or acquire successful startups.
However, there are a couple of big unknowns facing FinTech phenomena – first of all, can it convince the critical mass that they’re better than traditional banks? The question of trust will be decisive.
Additionally, financial regulations are changing but in a much slower pace than expected (Finnovista, 2016). Startups disrupting financial industry can have great ideas, but are often hindered by heavily regulated, innovation unfriendly environment, even to the greater extent than in transportation or travelling industries.
Lastly, it is still uncertain whether FinTech companies can generate recurring profits in the long-run.
One thing is clear – the dismantling of the traditional banks started and is gathering momentum.
Who will win the battle for our money? What is your guess?
References
Finnovista. (2016). Regulation is the first obstacle for Fintech startups. Why not change it? | Finnovista. [online] Available at: http://www.finnovista.com/keynotejuanllanosfsbog/ [Accessed 29 Sep. 2016].
Home.kpmg.com. (2016). The Pulse of Fintech – Q2 2016 | KPMG | GLOBAL. [online] Available at: https://home.kpmg.com/xx/en/home/insights/2016/03/the-pulse-of-fintech-q1-2016.html [Accessed 29 Sep. 2016].
Medium. (2015). What is FinTech? – Wharton FinTech. [online] Available at: https://medium.com/wharton-fintech/what-is-fintech-77d3d5a3e677#.rv80vywxn [Accessed 29 Sep. 2016].
N26. (2016). N26 – Banking by Design. [online] Available at: https://n26.com/ [Accessed 29 Sep. 2016].
The Globe and Mail. (2015). Banks could lose 60% of retail profit to tech startups: study. [online] Available at: http://www.theglobeandmail.com/report-on-business/fintech-startups-pose-threat-to-traditional-banks-retail-profit/article26587892/ [Accessed 29 Sep. 2016].
Williams-Grut, O. (2016). The 25 fintech ‘unicorns’ worth over $1 billion ranked by value. [online] Business Insider. Available at: http://uk.businessinsider.com/the-25-fintech-unicorns-ranked-by-value-2015-7 [Accessed 29 Sep. 2016].
Hello Mateusz Bochenczak,
I really enjoyed reading through your article! It gives a great insight into the current state of the financial industry, and how the development of information technology is affecting it. I believe you must have gotten some great insights into this sector and how FinTech is distrusting the industry during your time at Number26 🙂 It seems like convenience and transparency are at the heart of this evolution. Being able to manage all your finances in the most user-friendly and simple way possible is something that many traditional banks seemed to have forgotten. As such, I fully agree with you and the McKinsey statement that banks could lose up to 60% of their retail profits if they miss out on the step towards innovating these financial services (The Globe and Mail, 2015). With the focus on users & ease of use, startups like N26 are great example of how one can remotely set up a bank account in minutes and conveniently manage all his financial needs through the desktop or any mobile device. It will be interesting to see how the deep-routed and traditional banks of the industry will react.
References:
The Globe and Mail. (2015). Banks could lose 60% of retail profit to tech startups: study. [online] Available at: http://www.theglobeandmail.com/report-on-business/fintech-startups-pose-threat-to-traditional-banks-retail-profit/article26587892/
Dear Mateusz! Thank you for your post. While I do think banks will continue to exist for a longer time, I also think that many people have lost (part of) their trust in banks since the financial crisis. Having experienced a loss of trust, I think it will be hard for banks to fight against companies such as FinTech. However, I do believe it is smart of banks to acquire start-ups or merge with them, as this allows banks to keep up with the market trends and increase their chances of surviving. Of course, as you mentioned, it also depends heavily on how governments respond. If certain governments make it hard for financial start-ups to implement their ideas, they might move to a location where their ideas are more accepted. Your blog also made me think about BitCoin, and an article I read (http://www.newsbtc.com/2016/02/21/tony-robbins-governments-cant-control-bitcoin/). This article says that companies cannot devalue BitCoin, nor can they freeze accounts. Hence, if governments cannot stop BitCoin, maybe they cannot stop other financial ideas either, leaving room for start-ups to implement their ideas – only time will tell.
Dear Mateusz, thank you for your interesting post. What fascinates me most is where everything is going. Like you questioned, can FinTechs generate recurring profits in the long run and what do bank institutions do to counter this trend. My first though however was; do people really not trust in banks and prefer FinTechs? As I would imagine it is much harder for startups to establish a trustworthy connection to customers as they emerged “out of the blue”. You also mentioned that some bank embrace the trend and set up a FinTech department themselves, so I did a little research and just to give one example according to businessinsider (2016) Deutsche Bank has a FinTech strategy to invest 750 million Euros in digital products and services by 2020. They see FinTechs as potential partners as they already work with a robo-advisor. Deutsche Bank also stated that insurtech is an opportunity to them while P2P lending is not yet a priority.To come back to my question which system would people prefer, in my opinion, an established bank that I grew up with might seem trustworthier than a FinTech startup if they offer the same product. (Deutsche Bank might be not the best example now with a fine of $14 billion for mortgage-backed security misselling before the financial crisis happened… but it would work similar with other banks)
However, looking at the FinTech landscape (https://i1.wp.com/everisnext.com/wp-content/uploads/2015/12/everisdigital-innovation-fintech-landscape-jpg.png) it is clear that there are services that overlap with financial institutions and there are services that fall outside of typical banking services. In my opinion, even if banks invest more and more in FinTechs, there is a whole spectrum that has not fallen into the interest of financial institutions yet and present an opportunity for FinTechs to emerge and grow.
References:
BI Intelligence. 2016. Deutsche Banks Fintech Strategy. [ONLINE] Available at:http://www.businessinsider.com/deutsche-banks-fintech-strategy-2016-7. [Accessed 1 October 2016].
Everis NEXT. 2016. Top 9 verticals within the fintech landscape for large corporations. [ONLINE] Available at: https://everisnext.com/2015/06/02/top-9-verticals-within-the-fintech-landscape-for-large-corporations. [Accessed 1 October 2016].
Hey Mateusz, first of all thanks for this very interesting post !
It is indeed interesting to see how many FinTech startups have been created in the last 5 years, and even more to see how some of them still found a way to attract a solid base of customers within this very unfriendly environment that you mentioned. Personally, I think that the term Unicorns is indeed well chosen for those successful startups. Thinking that they would be able to take over todays banks is certainly optimistic and unreal. Again, the regulations, and the power that banks have today will certainly allow them to stay in control of the industry. Of course, banks will have to watch out not to lose too much share of the market and that is why they should not hesitate to unlock reserve funds to acquire the fastest growing and promising startups. Those startup’s ideas should be seen as a complement of the traditional banks’ business, and should therefore be integrated to their value creation processes.
In the end both segments are trying to serve customers from the same market in very different ways, but the combination of those startups ideas with todays banking would certainly lead to a rebirth of the industry.