Fintech Startups – Who are the new players in Banking? There are lots of technology and data driven companies out there trying to change the way financial services are delivered. Eloi Noya wrote this week about who these players are and what they are doing to change the financial services arena.
Innovation is the law of tomorrow. Disruption has occurred in virtually all industries in the last two decades, and it’s also starting to transform the financial industry. Banks, which maintained their dominant position thanks to factors such as highly regulated environments, are seeing the emergence of new competitors that threaten to steal a substantial market share, if not displace the incumbent banks from their leadership position.
Perhaps the most surprising and worrying phenomenon for traditional banking is the fact that these new financial competitors are innovating and growing in emerging countries. In Asia, Africa and Latin America, the percentage of unbanked people exceed 60% in all cases. However, people in this segment of the population do own a mobile device.
The massive use of mobile phones has allowed great successes, such as that of M-Pesa in Kenya and ten other African countries, which over the past decade has enabled more than 30 million users to transfer money, take out loans and make deposits using mobile phones, from the remotest rural areas. In China and neighboring countries, platforms such as WeChat have more than a billion users who perform all kinds of financial transactions using mobile phones with no need to open a bank account. Another Asian non-bank finance giant is Ant Financial, the financial arm of Alibaba, a high-tech company that allows hundreds of millions of users to pay immediately, borrow money in just three minutes or make investments in the world’s largest monetary fund. Ant Financial is already among the 10 largest financial companies in the world by valuation, and will surely be among the top five in a very short time.
Of the new entrants that threaten incumbent banks, fintechs are the most specialized. Fintechs are startups that focus on a single financial product or service. Fintech companies have three key characteristics:
- They focus on a single product or service, which they provide superbly, with lower costs and an exceptional user experience. One example is TransferWise, an international money-transfer application.
- They have a clear customer orientation. Without the heavy legacy of traditional banks, fintech can focus on solving users’ problems. One example is the Spanish application Fintonic, which allows clients to organize their bank accounts and manage their savings more easily.
- They usually use some sort of advanced technology to achieve a competitive advantage. One good example is Kabbage, an American small-business lender capable of gathering large amounts of data using artificial intelligence to grant credit in just ten minutes.
One type of fintech that could play a key role in the near future are the so-called neo-banks or challenger banks. These mobile-only banks only offer an account and a debit or credit card as their own products. All other products are offered through partnerships with other fintechs or daily-use companies. One example is N26, one of the largest neo-banks in Europe, which allows transfers via TransferWise, savings management with the fintech Nutmeg, and loans or investments in credits with the Lending Club platform – all in one app.
The success of neo-banks and fintechs has shifted the paradigm in which traditional banks operate. Just a few years ago, banks still cited their many physical branches as a competitive advantage over neo-banks, which did not have the possibility of close contact with customers. Today, the complaint of traditional banks is precisely that they have to bear higher costs than fintechs by maintaining physical branches and are therefore in the process of widespread closure of offices.
The positive experience of neo-banks suggests that it is now possible, through APIs, to connect different suppliers of financial products and services and thus expand the range of products available to users, without the need to produce these products and services from within the organization itself. This is known as the paradigm of open banking, a model that some traditional banks are beginning to adopt as a possible solution to the coming disruption.
The best solution for traditional banks threatened by new entrants may be to cooperate with fintech. While banks have advantages that fintech lacks – more capital, greater knowledge of regulations, recognized brands and customer confidence – fintech can bring new capabilities to banks, including agility, innovation, cost reduction, better user experience and greater ability to use data.
In my opinion, banks can maintain a degree of leadership and defend themselves against threats from new entrants such as big techs by transforming themselves into “fintech banks” or “marketplace banks.” This would be achieved through open banking. Banks would retain as their core business the banking license, the customer database or CRM, and the compliance activity. They would reduce their very broad range of in-house products to just one account, one debit and credit card, and one electronic wallet. All other products would be offered through APIs by fintechs and specialized financial companies, such as private banking boutiques or credit finance companies.