FinTech investment has risen spectacularly in recent years, on the back of promise, and in some instances, hype. A new report finds that European FinTechs themselves remain relatively confident about their revenue growth prospects in almost all market segments, with building trust with clients and customers and transparency of products/services cited as key success factors. Most startups are keen to enter into cooperation with incumbents.
The number of financial technology (FinTech) startups has, since the financial crisis, seen rapid proliferation. Buoyed by new technologies and changing market conditions, investor interest has sky rocketed – last year there were 1,162 deal with total value of $19 billion, in 2011 it was a mere 457 deals with a total value of $2 billion.
In a new report from Roland Berger, titled ‘FinTechs in Europe – Challenger and Partner’, the consultancy firm considers the European FinTech market, through a survey of 248 FinTechs from 18 European countries. The majority of FinTechs surveyed are active in the investments space, asset management, crowdfunding and payments, with over half pitching their products and services in the B2B landcape.
According to the respondents, the propositions that the respective companies bring to the market are unlikely to “revolutionize the industry alone”, rather providing a major source of innovation. While 95% of respondents said that they consider their digital competencies, in comparison to traditional institutions, to be superior to excellent, 86% are aiming to cooperate with traditional financial institutions. Most of the companies surveyed (70%) are also not seeking to become institutions themselves, rather, they seek to develop specific solutions for segments of the value chain.
The report notes that FinTech startups face a number of key trends and issues, with 73% underestimating the importance of regulatory competencies, 66% of respondents stating that they do not believe that they will replace traditional financial institutions, while 61% say that they expect large tech companies to become key future competitors in the market.
In terms of FinTech market segments that have the greatest potential, 55% of respondents cited ‘investing and asset management’, 54% cite ‘payments’, while 52% cite ‘crowdfunding/lending’. The least cited segment is ‘information/comparison portal’, at 13%, and ‘insurance’, at 32%.
Since last year, venture capital funders have become considerably more concerned about valuations – and, while European companies have tended to be more realistic about their future prospects, revenue potential remains a key indicator. In terms of FinTech segments likely to see the strongest growth, ‘crowdfunding/lending’ comes out on top, with more than 80% stating ‘strong increases’, ‘crypto/blockchain’ comes in at number two, with around 80% of respondents expecting strong increases. Around 70% of ‘Data management’ FinTechs too expect to see strong increases, while around 25% in the segment expect moderate increases.
Some segments, most notably crowdfunding/lending is subject to wider market conditions – a recent Deloitte report found that extremely low rates are inducing risk taking from investors through crowdfunding/lending, which may dry up as rates increase to normal levels. The crypto/blockchain market too, while holding considerable potential, still faces key hurdles related to, among others, scalability.
FinTech experts were also asked to identify what they believe are key success factors. The most important factor, cited by 71% of respondents, is the ‘trust of customers’ – which remains out of reach of many in some segments according to a recent analysis – followed by ‘transparency of products/services’, cited by 69% of respondents. ‘General customer understanding’ comes in at number three, as cited by 60% of respondents, while ‘convenient process’ was cited as key by 47% of respondents. A ‘digitalised business model’ rounds off the top five.
The factors seen as the least important include ‘serving different segment groups’, cited by 10%, a ‘trial and error mindset’, cited by 12%, and a ‘well-established trade mark’, cited by 14% of respondents.
Interestingly, when it comes to competition, FinTechs assign themselves a much higher degree of capability for four out of five key success factors in retail banking and insurance. The majority of the surveyed FinTechs for instance are very confident that they serve customer needs and that incumbents are behind on digitisation. They also believe that banks struggle with their structures and lack of innovation agility.
The report also asked respondents to identify how they would best collaborate with incumbents and other players entering the financial market on propositions. The most cited form was cooperation, at 86% of respondents, while 29% said that they would consider participation. 14% said that they would be keen to engage other parties through accelerators, while 9% would do so through an incubator.
The key reason for collaboration was found to be ‘access to a strong customer base’, as cited by 78% of respondents, followed by ‘business relationships’, cited by 60% of respondents. The ‘benefits of a well-established/trusted brand’ came in third as cited by 59% of respondents, while 49% sought ‘access to financial resources’. One of the key areas in which FinTechs tend to lack knowledge is regulatory know-how, among others, however, 38% of respondents cited ‘access to know-how’ as a reason for collaboration.
Outside of the proposition of FinTechs, and collaboration with potential partners, location is also influential on the success of FinTechs. When asked to identify key factors in determining the quality of a location, the ‘availability of know-how and talent’ was the most important factors, as cited by 83% of respondents. ‘Open-mindedness of regulatory authorities’ came in second, cited by 72% of respondents as important, while 68% of respondents said that the ‘availability of strong networks’ is key. Access to ‘FinTech-savvy investors’ comes in at number four, as cited by 67% of respondents, with the ‘status quo of regulatory circumstances’, rounding off the top five. The least important factors are the ‘availability of incubators/accelerators', cited by 26%, and ‘accessibility of regions with financial services focus’, cited by 37%.
Martin Krause-Ablass from Roland Berger, remarks, "FinTechs have a realistic view of their role in the market: while they are indeed changing the financial industry, they alone will not herald a revolution. What banks and insurance companies themselves can get out of collaborating with FinTechs are opportunities to drive their own digital transformation. For them, this is about more than technical disruption, it is also about cultural transformation. That is exactly why people say that digitization begins in the head – it is all about having the right mentality.”