This series takes an in depth look at the report “Blurred Lines: how Fintech is Shaping Financial Services”. For an intro on the topic, check out part 1 of the series before reading on. Part 2 will examine the future of FinTech and what strategies financial service providers should use to counter FinTech.
There’s a definite disruption. So, what are the exact risks?
There was a time when physical video rentals or purchases were the only way for people to watch movies from the comfort of their own home. As technology progressed, these physical video outlets didn’t take the steps needed to counteract the disruption from newer video streaming companies. Slowly but surely, the newer technologies gained market share and won over the mass consumer market to the point that outlets that rely solely on physical videos are just not sustainable.
Similarly, the risks are clear in the financial services industry. 23% of financial services business is at risk of being lost to other FinTech options. That means 1 in 4 services offered by most financial service companies will end up being taken over by standalone, independent FinTech companies. The services at risk of being lost to standalone FinTech companies within the next five years are shown in the graph below.
The pressure is being felt within the sector with 2 out of 3 companies believing that FinTech will cause pressure on their own margin in the next 5 years, with 59% believing that they will also lose market share to FinTech firms. Both of these threats can be attributed to FinTech offering high-tech options for basic and convenient financial tasks. The high-tech options are often leaner, carrying fewer overhead costs, which, in turn, allows for the service to be offered at a lower rate. That cost reduction is passed down to the consumer, lowering traditional financial institutions market share and putting pressure on the margins of traditional financial institutions.
However, it isn’t bleak as it seems. There are opportunities related to the rise of FinTech. If a traditional financial service provider is willing to adapt and pivot into the future the risks discussed above can be turned into competitive advantages and lead to improved customer retention through simplification of processes, reducing inefficiencies, and innovation.
What are some strategies?
Integration – if you can’t beat them, join them. 60% of survey respondents in the financial services industry agree that FinTech should be put in the heart of their strategies and 78% of CEOs believe the same. However, there is quite a disconnect between the beliefs expressed and actions taken towards integration.
While 84% of the fund transfer and payment sector believe that FinTech has been put at the heart of their organization’s strategy only 56% of banks, 45% of AM & WM sector, and 44% of insurance sector have put FinTech in the heart of their strategy. All of these figures fall well below what the average respondent believes should be done towards integrating FinTech into the company’s strategy.
The first strategy involves developing a “mobile-first” approach. This strategy has grown in popularity because the majority of the financial service providers believe that up to 60% of their clients will use a mobile application to manage or transfer their finances. Currently, 53% of the industry has a mobile application and 18% of firms in the industry have an app in development. It seems this has become a standard strategy to combat the evolving landscape caused by FinTech.
A second strategy involves collaborating with FinTech companies and integrating the FinTech systems into their own organization. There are many ways this could happen, with acquisition of the whole company, internal R&D, or a joint partnership. All of these have their own pros and cons, which is more of a business problem – but the end goal remains the same.
Since developing a “mobile-first” approach and bringing FinTech thinking into your own organization are the two predominant strategies, many financial service providers have made strides towards modernizing their systems. Other potential strategies to combat the ever-shifting landscape caused by FinTech companies involve altering organizational structure, however, for this strategy to succeed many factors such as talent innovation and luck must be present and the organization must be flexible.
The overall strategies fall in line with the mentality of “if you can’t beat them, join them” because the amount of business FinTech can disrupt is fairly high. Getting ahead of the curve in terms of new and emerging technology is the crucial step in dampening the disruption.
These strategies will become more mainstream as late adopters to FinTech get out competed and the industry matures. However, for the time being these strategies are the only way financial institutions can retain margins against the competition that is FinTech.