FinTech spurring banks and payments companies into active change

26 September 2016

A rapidly transforming payments and funds transfer space is, through the possibilities opened by digital technologies, spurring incumbents to act. A new study finds that 87% of the sector’s incumbents believe that some part of their business is under threat from FinTech, while 28% believe that a quarter of their operations might be lost to FinTech developments. The sector is responding by starting their own FinTech subsidiaries or entering into partnerships.

In a new report, titled ‘Payments in the Wild Tech World Digitisation and changing customer expectations’, PwC explores the effect of financial technology (FinTech) players on the funds transfer & payments market. The survey for the report involves 544 financial services respondents from 46 countries, with the focus on the funds transfer & payments institutions involving 24 respondents from the sector.

Highlight from the global FinTech report

In recent years, incumbents within the payments market have begun to focus on creating a range of digital offerings to improve customer experiences. As a result, cash transactions continue to decrease while online shopping booms. Rapid digitalisation, as well as increased online commerce, has resulted in a space within the market for new propositions that fill growing, and sometimes new, needs.

FinTech companies, generally startups (venture capital investments into the industry reached $19 billion last yearor large tech firms with R&D subsidiaries, have for some time been devising propositions within the funds transfer & payments space. The survey highlights that 87% of current players in the landscape believe that some parts of their business are at risk from FinTechs, while 28% believe that as much as a quarter of their operations could be lost by 2020. 

Engaging FinTech

According to the research, the vast majority of the current incumbents within the funds transfer & payments space, see themselves as delivering customer centricity – with respondents in the sector well above that of respondents in other financial services sectors in terms of ‘fully’ and ‘very’ customer centric. Customer centricity, in so far as incumbents are able to meet expectations, is a key pillar for offsetting one of the major benefits of FinTech providers.

The study also finds that companies within the funds transfer & payments sector are much more likely to have FinTech at the heart of their strategy, with almost 50% that agree compared to 30% in other financial services sectors, while 40% somewhat agree, compared to around 25% in other sectors.

Trends within the payments industry

The research further sought to identify trends within the space of the payment industry, by comparing the likelihood to respond to a trend with the trends importance. On the top of the list are advanced tools and technology through which consumers can be protected from identity theft, fraudulent transactions and account fabrication – which is becoming an increasing headache for companies across the globe. Faster payments, with transfers between banks still taking at least a working day in most cases, comes second, while the rise of the digital wallet, to ease online shopping, comes third.

The trend with the largest cohort of FinTech players is in the development of a new generation of point of sales solutions, which is seen as the fourth most important trend for incumbents. Other major areas of FinTech activity are in the development of peer-to-peer payment solutions as well as increased value-added to merchant service solutions.

Areas most important to impact on business

Asked for what area within FinTech will have the largest impact on their business, both incumbents and FinTech players agree that ‘meeting changing customer needs with new offerings’ is the area with the biggest impact, at 90% of incumbents and 80% of FinTech players. Enabling the business with sophisticated operational capacities comes second for incumbents, at 60%, and third for FinTech companies, at around 40%. Second for FinTech companies (45%) is ‘leveraging existing data and analytics to generate deep risk insights’, which is third for incumbents at around 35%.

The areas seen as the least impactful for both FinTech and incumbent players are to ‘enhance interactions and build trusted relationships', at around 35% apiece, and ‘new approaches to underwire risk and predict losses’, at around 30% apiece.

Dealing with FinTech companies

The survey also aimed to identify how incumbents are currently dealing with FinTech companies. The research highlights a number of divergent trends between funds transfer & payments companies and all financial sector players: firstly, 95% of incumbents are dealing with FinTech in some way, compared to 75% for all other sectors, and secondly, 35% of respondent incumbents are doing so by launching their own FinTech subsidiaries, compared to around 12% for all other sectors.

Incumbents are also more likely that other financial services sectors to enter into joint partnerships, buy and/or sell services to FinTech companies or establish start-up programmes to incubate FinTech companies.

Manoj Kashyap, PwC’s Global FinTech leader, says, “Customers want convenience, personalisation, accessibility and ease of use. To live up to these expectations, banks and FinTechs should focus on opportunities that leverage each other's strengths, whether in product design and development by start-ups, or distribution and infrastructure capabilities by banks. FinTechs are great at offering product simplicity and seamless integration, but they lack the proper IT security and regulatory certainty that banks have. We see both sides coming to the realisation of a new, mutually beneficial relationship and it’s ultimately the customer who will benefit the most from this.”

Related: UK FinTech capital of the world, but competition is heating.



The business and operating models of digital-only banks

04 April 2019

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.