ACCORDING to a PwC survey released last
month, 83% of respondents from financial services companies believe at
least part of their business is under threat from small challengers
relying on new financial technology.
Narrowing the respondents to CEOs and heads of innovation at banks, that figure rises to 95%.
The business models of banks are under attack, and they are forced to spend to counter the threats.
"PwC estimates within three to five years cumulative investment in fintech globally could well exceed $150bn, and financial institutions and tech companies are stepping over one another for a chance to get into the game," said PwC’s fintech leader for Europe, Middle East and Africa, Steve Davies.
Payment technology is one of the traditional banking channels most susceptible to challenge from fintech (financial technology) start-up companies that are targeting the segments of banking and insurance business models that present the highest margins and lowest costs.
A research note from McKinsey published in February estimates about 2,000 fintech start-ups are now offering traditional and new financial services. The researchers noted that the competitive moats of banking models are at risk of disruption through new digital currencies, payment networks, and digital wallets.
The attrition rate is high — McKinsey notes that PayPal is the exception to the rule in that it is one of the few fintech companies to succeed in disrupting banks, but the sheer number of challengers with diverse technological approaches to banking services demands that financial service providers take note of potential price wars and margin compression.
The approach McKinsey recommends for banks is "co-opetition" — rather than fighting a new technology, opting to invest in the companies that are developing it to ensure they can stay relevant.
John Conlon, Visa’s digital lead of performance solutions for Central and Eastern Europe, the Middle East and Africa, says some of the world’s most progressive and innovative banks are found in these regions, "but also some that are most at risk of being disintermediated".
"Banks need to keep their eyes open and learn from these smart fintech companies. There is opportunity to partner with them, much like an incubation space," he says.
"Banks need to identify the services these challengers might take off them, and respond accordingly."
This sounds like an impossible task, given the number of potential challengers, but Mr Conlon says established banks need to decide which platforms are worth adapting and defending, and to prioritise.
It may not be easy for challenger banks to get licences and break into credit or deposit services, but the highly lucrative payments market is under threat from peer-to-peer payment technology, and Mr Conlon says banks need to either adopt and migrate to their core service offering if it works, or learn from it if it does not.
"Banks shouldn’t try to develop everything themselves — that would be expensive and take forever. Go out to the ecosystem and partner up.
"Visa just offers the toolkit to developers to develop apps that plug into the network," he says.
Mr Conlon says Visa is also investigating its role in the development of blockchain technology in payment mechanisms, as well as the opportunity to play a role at more points in the customer’s payment journey.
Mr Conlon says this is a major cultural shift to avoid becoming the next Kodak of the digital age.
Visa is intent on becoming simply a platform itself, such as Uber or Airbnb, which own no assets, but simply connect customer and service provider.
One example Mr Conlon provides is a partnership with Honda and BMW that will allow car rentals to authenticate the driver and seamlessly charge for services and pay for insurance and tolls as and when the customer needs them, rather than the usual rigmarole of upfront payment or later settlement at a desk.
"Just remove the friction from the customer experience," he says.
The payment network is also trying to involve itself in driving purchases to create moments of payment by putting together offers with retail and banking partners, rather than waiting for transactions to happen.
"Look at trends and take a position. There are now digital-only banks arising, such as Simple in the US, which was just bought by the very progressive Spanish bank BBVA.
"There is also Atom Bank, a UK-based challenger bank with no branch network. It’s targeting millennials who don’t want to go to branches.
"They want account set-up, transfers and service personalisation in the digital space. Its philosophy is to evolve — it has no fixed services and is moving towards true algorithmic banking," Mr Conlon says.
In this business model, there are no blanket product launches, and only virtual cards, while data collected about customers allows the digital bank to learn about each customer’s behaviour and anticipate what the customer may want next.
"Customers are dictating what products they want and how they want to use them. There will be brands like Facebook, Apple and Google who will look to play in payments, and banks need to adapt or risk dying out."
Banks can use platforms such as Facebook to bring down costs of customer acquisition, teaming up with the social network to find customers similar to the profile they want to attract and beginning to engage with them there.
Mr Conlon praises SA’s First National Bank for being an example of a proactive bank that is looking to move into the digital whitespace to position itself for adaptation.
"Customers use apps for other things, so they expect to be able to interact with their banks in the same way," he says.
The business models of banks are under attack, and they are forced to spend to counter the threats.
"PwC estimates within three to five years cumulative investment in fintech globally could well exceed $150bn, and financial institutions and tech companies are stepping over one another for a chance to get into the game," said PwC’s fintech leader for Europe, Middle East and Africa, Steve Davies.
Payment technology is one of the traditional banking channels most susceptible to challenge from fintech (financial technology) start-up companies that are targeting the segments of banking and insurance business models that present the highest margins and lowest costs.
A research note from McKinsey published in February estimates about 2,000 fintech start-ups are now offering traditional and new financial services. The researchers noted that the competitive moats of banking models are at risk of disruption through new digital currencies, payment networks, and digital wallets.
The attrition rate is high — McKinsey notes that PayPal is the exception to the rule in that it is one of the few fintech companies to succeed in disrupting banks, but the sheer number of challengers with diverse technological approaches to banking services demands that financial service providers take note of potential price wars and margin compression.
The approach McKinsey recommends for banks is "co-opetition" — rather than fighting a new technology, opting to invest in the companies that are developing it to ensure they can stay relevant.
John Conlon, Visa’s digital lead of performance solutions for Central and Eastern Europe, the Middle East and Africa, says some of the world’s most progressive and innovative banks are found in these regions, "but also some that are most at risk of being disintermediated".
"Banks need to keep their eyes open and learn from these smart fintech companies. There is opportunity to partner with them, much like an incubation space," he says.
"Banks need to identify the services these challengers might take off them, and respond accordingly."
This sounds like an impossible task, given the number of potential challengers, but Mr Conlon says established banks need to decide which platforms are worth adapting and defending, and to prioritise.
It may not be easy for challenger banks to get licences and break into credit or deposit services, but the highly lucrative payments market is under threat from peer-to-peer payment technology, and Mr Conlon says banks need to either adopt and migrate to their core service offering if it works, or learn from it if it does not.
"Banks shouldn’t try to develop everything themselves — that would be expensive and take forever. Go out to the ecosystem and partner up.
"Visa just offers the toolkit to developers to develop apps that plug into the network," he says.
Mr Conlon says Visa is also investigating its role in the development of blockchain technology in payment mechanisms, as well as the opportunity to play a role at more points in the customer’s payment journey.
Mr Conlon says this is a major cultural shift to avoid becoming the next Kodak of the digital age.
Visa is intent on becoming simply a platform itself, such as Uber or Airbnb, which own no assets, but simply connect customer and service provider.
One example Mr Conlon provides is a partnership with Honda and BMW that will allow car rentals to authenticate the driver and seamlessly charge for services and pay for insurance and tolls as and when the customer needs them, rather than the usual rigmarole of upfront payment or later settlement at a desk.
"Just remove the friction from the customer experience," he says.
The payment network is also trying to involve itself in driving purchases to create moments of payment by putting together offers with retail and banking partners, rather than waiting for transactions to happen.
"Look at trends and take a position. There are now digital-only banks arising, such as Simple in the US, which was just bought by the very progressive Spanish bank BBVA.
"There is also Atom Bank, a UK-based challenger bank with no branch network. It’s targeting millennials who don’t want to go to branches.
"They want account set-up, transfers and service personalisation in the digital space. Its philosophy is to evolve — it has no fixed services and is moving towards true algorithmic banking," Mr Conlon says.
In this business model, there are no blanket product launches, and only virtual cards, while data collected about customers allows the digital bank to learn about each customer’s behaviour and anticipate what the customer may want next.
"Customers are dictating what products they want and how they want to use them. There will be brands like Facebook, Apple and Google who will look to play in payments, and banks need to adapt or risk dying out."
Banks can use platforms such as Facebook to bring down costs of customer acquisition, teaming up with the social network to find customers similar to the profile they want to attract and beginning to engage with them there.
Mr Conlon praises SA’s First National Bank for being an example of a proactive bank that is looking to move into the digital whitespace to position itself for adaptation.
"Customers use apps for other things, so they expect to be able to interact with their banks in the same way," he says.
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