Despite all the excitement and predictions that fintech companies would rout traditional banks, the disruptors have so far failed to take significant business from the incumbents; to date grabbing just a 2 per cent market share.
This is the view of Ben Robinson, head of strategy at software giant Temenos and a mentor at Fintech Fusion, Switzerland’s first fintech start-up accelerator, who noted the enormous sums that have been sucked in from investors – over US$100 billion in the last three years.
“Certainly, it is harder to disrupt financial services than many people envisaged. And banks retain many competitive advantages, as well as the ability to innovate. But to write off fintech would be premature,” he wrote in a report.
His view jibes with new research released jointly by the World Economic Forum and Deloitte Consulting, which also concluded that fintechs have not yet materially altered the competitive landscape.
“Fintechs have changed the pace of innovation and reshaped customer expectations across the financial services ecosystem, laying the foundation for future disruption in the industry,” said Rob Galaski, partner at Deloitte Canada.
So away from the hype fintech is delivering real change - mostly indirectly - by forcing banks to raise their game.
Hooked on banks
Robinson doesn’t disagree, pointing out that while only taking 2 per cent market share, fintech models continue to evolve, expanding product offerings as well as pushing into the middle and back office and indirectly helping to lower bank spreads, introduce new products and raise customer service levels.
“However, many consumer-facing fintechs have struggled to achieve scale in the face of high switching costs,” said R. Jesse McWaters, Financial Innovation Lead at the World Economic Forum.
“Meanwhile incumbent financial institutions have been able to catch up faster than many expected, treating the proliferation of fintechs as a supermarket for capabilities that allow them to use acquisitions and partnerships to rapidly deploy new offerings.”
And, Robinson argued, becoming a successful fintech company is hard given how entrenched big financial institutions are in markets they have long dominated.
“The cost of acquiring customers is chief among the challenges: it takes a lot of money to get on the radar of time-and-attention-poor consumers and even more to persuade them to change their banking habits," he said. “Conversely, only having a small number of products and services gives little opportunity to up-and-cross-sell and so spread that high cost of acquisition across a lot of revenues.”
In Robinson's view, this is the challenge facing companies such as Lending Club (which spends US$200 on average to acquire each new customer) and Roboadvisors, whose customer acquisition cost is estimated to be around US$300 on average.
Furthermore, he noted, a lot of fintech business models are inherently fragile. He cited marketplace lending where “either the intermediary does not add much value (by just acting as an introducer, for example) or it takes risks for which it lacks the level of funding needed to do what banks do: provide depositors with instant liquidity and minimise risk".
This incidentally is why lenders such as Zopa are applying to become banks, he argued. In addition, banks retain many advantages in the digital world and continue to score much more highly on trust than fintechs and other potential competitors.
If banks are not already considering fintech partnerships, they should be. But the European Payment Services Directive 2 - or PSD2 - is likely to usher in a new era of open banking and, against this backdrop, banks will see that opening up their distribution networks to fintech companies is a smart and necessary move.
“Open, collaborative business models give customers access to greater choice, create new revenue streams for banks but most importantly provide a set of capabilities that could otherwise easily be offered by internet platforms – such as Amazon or Facebook – moving into financial services," Robinson added.
“Moreover, with the fillip that PSD2 could give to the fintech industry, by allowing fintechs to aggregate customers’ banks accounts and initiate payments on banks’ systems via APIs, it would be too early to say that fintech firms can’t take much greater market share or revolutionise banking.
"The revolution hasn’t happened yet - but with PSD2 coming the banks best bet is to bring fintech companies into the tent: not to compete but to collaborate. To mitigate the threat from internet platforms.”
To Robinson, it would be ‘Canute-like’ not to see how open banking will bring about radical change. Technology might have lowered barriers to entry, he said, but it is regulation that will make banking online truly addressable.
Richard Miller, head of Deloitte’s local Payments Advisory Practice has a fair idea of how things will play locally.
“It’s an exciting time for Australian financial services because we have global and regional tech giants like Apple, Google and Alipay providing real impetus for innovation, we have local and international start-ups that are bringing ideas to market and none of our local institutions are standing still," he said.
What sets Australia apart is banks are relatively progressive, the regulators are progressive and the system works well so there is less of an under-served profit pool for fintech’s to go after as there was in the US where PayPal developed a work around to deal with a fragmented system.
“I think we will see a lot of fintechs but the potential for actual disruption will only occur if one or another of them can provide a front-end customer experience, a better platform and access to potentially diverse range of financial services providers," added Miller.