Fintech Start-Ups: Threat or Innovation Partner?

The emergence of new technologies and fintech start-ups is having a direct impact on the business models of most banks. While this transformation can be a threat, there is also an opportunity for innovation and collaboration with these new players.

By Jim Marous, Co-Publisher of The Financial Brand and Publisher of the Digital Banking Report

The surge in innovative start-ups in retail banking has grabbed the headlines over the past several years. Until recently, the focus has been on those start-ups that were competing directly with banks for customers. Today, however, a broader category of fintech players has become more prevalent – start-ups that are being financed or are partnering with traditional banking organizations to improve the overall consumer experience.

According to the 7th Annual Innovation in Retail Banking Report from Efma and Infosys Finacle, the highest perceived threat to banking is from tech companies like Google and Apple, seen as a high or very high threat by 45% of banks. The second highest threat is perceived to come from start-ups (41% of banks regard the threat as high or very high), even though even the largest of these firms still lack significant scale.

So, while the banking industry overall perceives that the threat of industry disruption in retail banking as growing – 72% regard the threat as high or very high from at least one group of potential competitors – some firms are looking to these same new fintech start-ups as a way to enhance products and services, reduce costs and/or expand market share. The 60-page Efma study also found the banking industry responding to these new threats by increasing investment in innovation.

Disruptive Technologies and Business Models

The term ‘disruption’ has been debated repeatedly when discussing the impact of new fintech start-ups on the banking industry. While there has definitely been a great deal of activity in the areas of mobility, analytics, and the ‘internet of things’, the Efma report notes that the level of disruption has been limited somewhat due to regulatory constraints and consumer inertia.

When asked which technologies were the most disruptive, Efma found that ‘mobility’ and ‘advanced analytics’ were the two most disruptive, with 59% and 57% of the respondents believing the disruption level was either ‘high’ or ‘very high’. These were followed closely by ‘open APIs’ (53%) and the ‘internet of things’ (47%). Interestingly, ‘cryptocurrencies’ and the ‘cloud’ were seen as lower threats despite increased discussion around the impact of the blockchain.

While each of these technologies are important in their own right, the ability to leverage advanced analytics may be the most important from a competitive perspective since legacy banking organizations have unequalled insights into customer demographics, behaviors and trends. In the research report, Efma provides several case studies of organizations that have used customer intelligence to their advantage.

Beyond disruptive technologies, disruptive business models such as P2P represent an area of significant change. Beyond a payment strategy (Venmo), P2P has also had an impact on lending (Prosper and Lending Club), money transfer (TransferWise) and even investment services.

Innovation in Retail Banking and Impact of Fintech Start-Ups Infographic

The Impact of Start-Ups

As noted in the Efma research, the core business of most banks is providing a checking (current) account with associated payment, transaction, savings and investment/insurance services. While there are global examples of start-ups offering core services, the number of firms offering a wider breath of services is still relatively small.

The UK, however, is quickly becoming an interesting market, since relaxed regulations have enabled a number of mobile-first banks to become active players – including Atom, Starling, Lintel, Open Bank and Mondo. Most other start-ups globally are using a ‘bank-lite’ model based on a prepaid debit card linked to a mobile phone app.

When asked about the impact of start-ups, Efma found that the areas of payments and digital marketing were the areas where banks expected start-ups to have the greatest impact. Almost three-quarters of banks (71%) believed the impact will be high or very high in payments, with the greatest impact on mobile P2P payments (61%) and mobile wallets (54%). Close to two-thirds (65%) expected the impact to be high or very high in digital marketing.

The ‘Coopetition’ Potential of Start-Ups

According to Efma. “It is clear that start-ups are at the forefront of innovation in retail financial services. In some areas they are competing with banks, and in other areas they are developing products and services that can be used by banks. Either way, there is an opportunity for banks to work with start-ups, as partners or suppliers.”

For the rest of the article on the opportunities and threats of fintech start-ups, go here ...