September 27, 2015
The rapid rise of FinTech startups seems to be throwing some shade on the banks basking in the sun. As the payment technology evolves, FinTech startups are found to be more imaginative in making money handling easier for consumers. In fact, payment companies raised more than $1 billion just in Q1 2015. Although the FinTech startups sector is growing rapidly, it is unlikely they will replace the banks because they actually rely on existing bank accounts. However, FinTech startups tend to shrink the banks’ profitable sectors making it harder for banks to maintain low-margin services.
In addition to threatening the sources of profit, FinTech startups have an advantage of not being under the eye of strict governmental controls. They can easily embrace the latest technologies available to provide seamless experiences and continue to experiment with new services. On the contrary, banks are operating in a highly regulated environment and have to take into account numerous restrictions related to financial services.
The threat coming from FinTech startups may not be obvious now with the five biggest banks controlling nearly half of the financial industry counting assets in trillions. However, the decline may come in the near future with emerging investments in FinTech according to the SVB 2015 FinTech Report on Investment Trends in FinTech that provided a number of $3.1 billion invested into the FinTech sector in the last quarter of 2014 throughout 214 deals. Moreover, according the Accenture latest report on the Future of FinTech and Banking the global investment in FinTech ventures tripled to $12.21 billion in 2014 signifying 201% of global growth in comparison to previous year.
Nonetheless, the banking industry has the financial power to fight this upcoming decline. Banks have to adjust to fast a changing environment and the growing demand for customized services as well as leverage the meaning of technology in consumers’ lives. What are the ways in which banks could potentially beat FinTech startups in a fight for profitable customers?
One of the ways is mergers and acquisitions. Why waste time and effort on fighting them if you have the power to buy the competition. One of the recent examples is the fully digital bank Simple being acquired by BBVA for $117 million. A great advantage of acquisition is the potential to reach new audiences, gain experience in serving them and collect insights on how to do it successfully.
Another way the banking sector can fight the FinTech startups is creating mentorship programs and taking advantage of the experience for themselves. Bank of America Merrill Lynch, Citi, Barclays, HSBC, J.P. Morgan, Credit Suisse, Goldman Sachs and other banking industry giants got involved in FinTech Innovation Lab that is aimed to foster relationships between startups and banks. According to WSJ, in 2013 two $100 million FinTech funds were set up, SBT Venture Capital by Russian bank Sberbank and BBVA Ventures in Silicon Valley by Spanish bank BBVA.
So far, the ways the banking industry is responding to the challenge does not seem to be a fight; rather, there seems to be a tendency to learn and adopt the best from what FinTech startups have to offer in order to improve their own traditional financial services. Being ready to accept the coming threat, the desire to collaborate and invest for a better customer experience for positive industry evolution are key factors for the banks to stay relevant and move forward.
However, even if banks can benefit from collaboration with FinTechs it is crucial to understand the reasons why FinTech startups are so successful in serving the needs of large new segments. To understand those reasons banks need to dig deeper into the nature of the audience allured by FinTech startups. It is a consumer-centered approach of dealing with the potential threat.
One new generation of consumers of financial services are Millennials. They are known for disrupting industries, being technologically savvy and hungry for information and innovation. According to the The 2014 ICBA American Millennials and Community Banking Study millennials are the most diverse and the largest generation in America (79.8 million). They represent the generation that is swayed away from traditional banking by the innovative and fast changing FinTech sector. In fact, 74% of millennials stated the importance of mobile banking. For traditional banks, it means the necessity to improve and prioritize channels of communication and service that are preferred and important for such a large powerful audience. A number of studies made by institutions like Bank of America, FICO, BNY Mellon, National Endowment for Financial Education, U.S. News and EY are showing the importance and power of the millennials. They are the main influencers that banking industry should be focusing on to be able to move forward in the right direction.