FinTech to disrupt banking industry, but not just yet

While most retail banking customers remain loyal to their bank for current accounts, 48% defected to other institutions for mortgages, a recent Capgemini report into customer banking satisfaction and behaviour finds. And while banks to date have been relatively well insulated from disruptive players, the survey too highlights that banking executives rank the threat from FinTech to be high – although only 61% expect that threat to materialise in the coming three years.

In a recent report, titled ‘World Banking Report 2015’, Capgemini and Efma examine the competitive threats perceived to be distorting the banking industry. The ‘Voice of the Customer Survey’ involved more than 16,000 respondents across 32 countries in six geographies. These customers provided input on their experiences across 80 different retail banking touch points spanning the full range of products, lifecycles and channels – while the survey also asked banking executives about their perception on the banking industry and how they thought their customers view their services and offerings.

Primary channel
The report highlights that while competition is on the increase for customers, certain products like current account balance are largely held at only one institution to which the customer remains loyal – on average most customers (77%) maintained their current account at their primary bank– with slight regional variation, with North America and Western Europe showing a 6.2% defection rate while in Latin American and the Asia-Pacific region the defect rate is 2.5% and 3.8% respectively. For other products the averages for primary bank usage are 62% for credit cards, 60% for personal loans, and 53% for mortgages.

Regionally there are differences in the defect rate for other products, especially loans and mortgages. In North America for instance, 33.3% of customers have a loan from an non-primary institution, while 26.8% have a mortgage from another institution, in Western Europe the numbers are slightly lower, with 21.9% and 26.1% respectively. Latin America and the Asia-Pacific region show much lower rates of defection – with only 15% and 20.2%, respectively, having a mortgage from another intuition.

Product pull
The researchers also find that the way in which consumers engage with their banks differs from the expectations, or knowledge at hand, within banks. This is true in how customers hear about products, the research they do into the products and the application for that product, with other entities, like price comparison websites and other aggregators, becoming increasingly important to consumer choice.

For current accounts for instance, 30.6% of customers hear about it from a non-bank entity, compared to the 19.5% expected by banks. Non-bank channels are also much more proficient at informing customers of mortgage products (41.5%), compared to the belief of banks at 31.7%. When researching mortgages, 43.3% of customer respondents turn to other entities while 17.1% to other banks, compared to the bank’s perspective that 22.6% turn to other entities and 27.3% to other banks.

The report notes that there is considerable regional variation across the three dimensions taken under scrutiny. In the US, 52.7% of respondents first heard about loans from other entities, 55.3% used them to research loans, and 48.0% applied for loans from them. While in the United Arab Emirates, 64.8% of respondents first heard about mortgages from other entities, 59.1% used them to research mortgages, and 43.2% applied through them.

Fintech
With the development of new technologies, new threats to banks are arising. Particularly new payment methods, like Apple Pay and Google Wallet may come to offset the banks’ dominance in payments, as well as whole new competitors and products arising from for instance fast growing Financial Technology (FinTech) companies.

According to Capgemini and Efma, part of the worry from banking executives comes from the comfort levels customers feel in banking with different entities. Internet/technology firms score highest with 83.3% on the basis of their intuitive and convenient offerings, while banks themselves score considerably lower at 64.8%. Product comparison websites score 55.6% while agent brokers remain low in terms of customer comfort levels at 27.8%.

FinTech companies are seen as the highest threat to banks by executives, although that threat is still considered more than 36 months from reaching maturity. On a seven point scale, the threat from internet/technology firms is given a 5, higher than for instance other banks and/or financial services companies. With FinTech booming globally – over the last year the market tripled from $4.05 billion to $12.2 billion – the disruptive force of the phenomenon is on its way to make a grand entrance. Within the coming 36 months other banks are considered the most threatening (indicated by 85.2% of banking executives), with other financial services companies highlighted by 73.6% of respondents.

For internet/technology companies the risk is mainly coming from tech companies’ ability to tailor customer experiences in ways that makes their offering more appealing than that of tradition banks, thus “capable of using their expertise in innovation to re-invent banking in brand-new ways.” According to the report, banks are reacting to the changes, and are themselves looking to invest big capital into promising businesses. The authors note however that “while the banks adopt different strategies to counter the rising threat from the new competitors (i.e. FinTech and Internet/technology firms), they should be mindful of the potential of these new players to disrupt the banking landscape.”