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Retail banking and Fintech

Fintech startups in every aspect of retail banking are making their presence felt but banks are not running for cover just as yet. The reason threat factors are low is because startups are all fragmented and more importantly the customer acquisition process is slower than the rate investors are pouring money in.

As The Economist points out “No Fintech product comes close to matching the convenience and security of a current account at a bank” so why then all these startups are in the headlines? If one reads through the 2016 predictions on Fintech (about 20 unique one’s) there are some distinct themes emerging, a few (un) explainable technological developments (read Blockchain), astute leaders of startups who were once part of the system that they seek to improve and to top it off – interest in Fintech from investors, banks, regulators, skeptics, media – has not been a disappointment and hence – the press coverage.

Fintech Retail Banking Landscape

The infograph above is by no means exhaustive but shows the trend of disruption. We are in a phase where ideas are mushrooming and like in any evolutionary cycle some will have an impact and some will fizzle out. Fintech startups are sprouting in a few broad segments – challenger banks, Robo-advisers, online wealth advisers, P2P lending, Crowdfunding and Payments – with the intent to positively impact the customer experience.

KPMG Fintech innovators report reveals 25% of Top 100 innovators are payment platforms, this is in addition to those that already exist. There is a similar thread in this list for lending (22%) and wealth (14%) companies. The growth in the number of new crowdfunding platforms, P2P lending and Robo-advisers has been significant in last few years.

Fintech in the retail banking space is a new emerging segment but within the sub-segments the exposure of Fintech is unevenly weighted. We are at the center of high quality innovation and at the same time witnessing innovation inertia and refinement to the n-th degree within certain segments.

The payment platform segment is overcrowded. P2P lending is creating tax efficiency based returns when compared to cash savings or even capital markets. Robo-advisers are designing products to enhance yields and make fund management more accessible. Crowdfunding is providing access to a private marketplace and creating a new asset class. Challenger banks are digital only with a cost-effective model. Wealth management is blurring the lines between wealth-private-retail banking with the aim to acquire larger digital client base. If each one operates independently where on earth are retail consumers going to get the user experience? This is an investor’s and a customer’s nightmare.

Banks on the other hand are using the opportunity to streamline their digital infrastructure but possibly cannot match the flexibility and nimbleness of a startup. With defragmentation the name of the game, banks can utilize their investment budgets to capture some value and make their ecosystem more efficient.

Fintech companies have disrupted to the end consumer’s benefit but in the process they have also created new processes, new asset classes and a slew of apps that have yet to find a seamless home. The challenge for the retail banks and Fintechs is to synthesise concepts that will create value and intuitively enhance user experience.

The regulator will have to re-lay the ground rules on aspects more than just client money protection and focus on standards for data collection, security protocols, cryptography whilst still ensuring and enabling innovation.

Amidst all of this, are we going to see a few balloons burst in Fintech 2016? Maybe.

We are at a point of inflexion where investors will likely start to scrutinise their Fintech portfolios and ascertain the rate of customer acquisition, business models and more importantly how the portfolio companies can find synergies and asses the impact of a Fintech company in the value-chain.

Featured photo is from https://stocksnap.io