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How fintech is reshaping consumer banking

 (Photo : PwC Luxembourg)

(Photo : PwC Luxembourg)

The banking sector is on the brink of disruption led by the disaggregation of simple products and service offerings. Traditional players must take action and prepare to compete in a market that is being reshaped by fintech companies.

Banking executives agree that banks need to have a greater focus on the customer. However, in practice, they demonstrably lag behind new players that enter the banking space. Only 53% of incumbents believe they are consumer-centric, compared with over 80% of fintechs. New entrants don’t just focus on customer service in the traditional sense, but understand and meet evolving customer needs with dynamically different product design and delivery.

A threatening rise of fintech

By prioritising continuous access, fintech companies offer services available via non-traditional channels like social media which, by 2020, will be the primary medium to connect, engage, inform and understand customers. It will also be the place where customers research and compare banks’ offerings. Traditional banks’ online offerings are archaic compared to those of fintech and they frequently do not properly address changing customer needs.

Moreover, banking clients are taking cues from other industries that offer multichannel access, product simplicity, seamless integration and 'segment-of-one' targeting. They want to feel like their bank is anticipating their needs, not bombarding them with product leaflets. They want transparency and no surprises in terms of fees. Those banks that do not adopt a fintech-centric strategy might soon learn that new entrants pose risks and have the ability to disrupt many facets of their businesses by usurping market share, squeezing margins, delivering information security and stimulating customer churn. All these threats are more likely to materialise themselves in the banking industry than they are in other financial sectors.

Targeting the underserved

By observing and often experiencing first-hand what banks offer - or do not offer - new entrants pick off segments of the banking sector and develop narrowly-defined, but highly-effective solutions to manage customer expectations. In particular, they focus on:

  1. solutions for customers unable to get loans due to no or poor credit scores;
  2. peer-to-peer (P2P) marketplaces for customers unable to secure loans from traditional sources;
  3. and personal finance management tools.

Fintechs also target business clients; a growing number of new players are offering B2B solutions. Many new entrants are delving into lower profile services, such as invoice automation, back-office operations for lending and providing commercial solutions for SMEs and micro-businesses. As 76% of surveyed banks know that new entrants are directly targeting their customers, almost 80% of executives believe that at least some portion of their business is at risk to these players.

Co-operation: the best way forward

Aware of the changing rules of the game, however, 42% of banks are already engaging in joint-partnerships with fintech companies - a proportion much higher than in any other financial sector. Banks are also the most active of all financial industries in setting up venture funds to fund fintech companies (19%), and are the financial industry’s frontrunners (together with fund transfer & payment companies) in white-labelling, i.e. rebranding purchased fintech services. Co-operation should benefit both parties. Potential opportunities arising from banks teaming up with new entrants span product design and development that could be used by incumbents, and distribution and infrastructure capabilities that would prop up fintechs when entering the market. One thing is sure: to stay competitive, banks of the future will have to turn drastically revise their status quo.

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