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Fintech disruption. Hype or reality?

Earlier this week ACI Worldwide published the findings of a YouGov survey asking ~2000 UK consumers about their attitudes towards banking and new entrants, their payments patterns and behavior.  We presented our findings to the media, with the headline “Digital disruption in the UK banking sector is still moving at a slow pace” and concluded the following:

 

  • Majority of UK consumers have no intention of switching bank accounts, but will quickly adopt new services that are convenient and easy to use
  • Opportunities to disrupt status quo exist and banks must be ready to grasp them
  • History of adoption of new services shows there is likely to be a ‘tipping point,’ especially for younger customers who will follow where their peers leads

 

How media companies choose to present press releases is ultimately their choice. And it has been interesting to see journalism in effect with articles varying to different degrees from the story we provided. Two varying media reports spring to mind; one from Finextra and one from  FSTech. For me the story on FSTech was closer to the ACI interpretation of the survey findings. Finextra took a slightly different angle, but the comments posted on their website, as well as Twitter feeds from other media posts, did a great job of highlighting an ongoing debate in our industry that I will summarize as this: Is FinTech disruption just a bubble?

 

As far as my opinion goes, I think FinTech is a bit of a bubble, yes, but it’s is a crucially important bubble to the positive transformation of this industry. The industry is disrupting. It’s a fact. Yes, it may be going at a leisurely pace from a consumer’s perspective, but what did we expect? How many years did it take for the Internet to truly become mainstream? Consumer behavior is something that Apple clearly understood when they brought out the iPad, bringing to market something that no-one felt was needed until it was there, and then suddenly people realized they couldn’t live without it. And as one guy in the comments stream at Finextra pointed out, how can the UK population know they don’t like something when they haven’t even seen some of it yet?

 

If we take a different look at the YouGov results we can clearly see change is taking hold in the UK. For example 12% of consumers will change their bank in the next year; 22% of consumers would use banking services from Google / Apple / Facebook; and 41% of consumers do use mobile banking. As a percent of the UK population these numbers are huge. Not only that, the results depict a trend towards digital disruption showing that consumers are actually in the early days of embracing and encouraging this change. This is an impressive segment that is emerging, and the growth of this “digital segment” will only get bigger as Gen Y / Millennials become more the norm. The fact then that 88% of UK consumers will stay put with their current bank is probably good for the incumbent banking provider in the next year, but what about the year after? Of the year after that? It is now that the banks needs to differentiate themselves from their competition and find ways to better attract and retain their customers.  

 

We are still in the early stages of transforming this industry. We are seeing some absolutely phenomenal innovations in our industry right now. In transforming the way we interact with our banking providers, some of the start-ups we are hearing about will succeed. Most will not. But the sheer strength of influence being driven into the industry by these pioneers is undeniable.   

 

I think next year is the year to watch. Against a backdrop of continued regulatory pressure to open the market to more nimble, "value chain cherry-picker" start-ups, in a world where FinTech still equals "cool" (not to mention sky high valuations), Retail Banks will continue, and in some cases speed up, their focus on embedding flex, innovation and value back into their aging platforms. As part of this transformation, we will see continued disruption as Retail Banks look for ways to compete with (or utilise) heightened customer experience from FinTech start-ups. I'd also expect a few industry reshuffles as Retail Banks trade cards (excuse the pun) to sell underperforming business units whilst investing strategically and buying up businesses up for sale by some of their industry brethren.

 

So each story has a balance to it; glass half full or glass half empty; yin and yang. But the one thing we can all agree on is that the status quo is evolving, whether fast by one person’s standard or slow by another’s, disruption is happening all around us. The only question that really remains is if you are a Financial Services Provider, how do you best harness the disruption to effectively compete in this new reality?

 

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Comments: (11)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 18 December, 2015, 11:41Be the first to give this comment the thumbs up 0 likes

Several wannabe-disruptors eat humble pieIn this WSJ article (http://www.wsj.com/article_email/banks-and-fintech-firms-relationship-status-its-complicated-1447842603-lMyQjAxMTA1MzE5ODYxNzg4Wj) e.g. “Time humbles you,” said Ben Milne, co-founder of Dwolla, .... Working with banks, he says, is the difference between running a sustainable business and “just another venture-funded experiment.”

I'm sensing a common belief that use of mobile banking, PayPal, SQUARE, ApplePay, etc. means disruption. I totally disagree. As I've explained in my comment on the other Finextra article (http://qwt.io/s_ketharaman/vi8Q), these PSPs increase revenues of banks.  

Since most fintechs use banking rails, they're dependent upon banks for their own survival. On the other hand, banks can shut down fintechs by simply cutting off their access to the banking rails.

None of this sounds like disruption of banks by fintech. In fact, all of this points to a mutually-beneficial partnership between banks and fintech in which banks clearly have the upper hand.

Dean Wallace
Dean Wallace - ACI - Global 18 December, 2015, 11:59Be the first to give this comment the thumbs up 0 likes I think you're right. Do you think the majority of banking exec decision makers see it that way? I keep hearing terms like "banks becoming a dumb pipe" stated in a negative way, but I agree with your comment that the fintechs (on the whole) drive incremental revenue and will actually innovate the industry WITH banks continuing to grow revenues. And it's not disruption of the banks that I see people like me and you talking about - it's disruption of the wider industry. Interesting times :-)
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 18 December, 2015, 16:26Be the first to give this comment the thumbs up 0 likes

Somebody asked a related question on Twitter yesterday. Let me simply copy-paste my reply:

=====

Ron Shevlin ‏@rshevlin Dec 17
There's a growing trend of bank execs who talk about disruption and "uberization" but do nothing about it in their own banks.

GTM360 ‏@GTM360 Dec 17
@rshevlin My guess: They're angling for plum jobs in hot, well-funded fintech startups!

Ron Shevlin ‏@rshevlin
@GTM360 I think you're absolutely right.

=====

When it comes to this dumb pipe - intelligent pipe debate, it all depends on how a bank wants to define its remit. To illustrate my point with an example: Should a bank stop at giving a loan to a builder (which is a 5% margin relatively dumb business) or actually build the world's tallest building with that money (which can perhaps yield 30% margin and is certainly a more glamorous business). I know some bank execs who favor the first option and some other bank execs who favor the second option. For the sake of argument, I've taken regulation out of this equation.

To play a bit loose with an aphorism, it's not as though banks are queuing up in front of the soup kitchen. With whatever boundary they've set for their remits, they're extremely profitable:  

  • Financial services was the most profitable sector in FORTUNE GLOBAL 500 in 2013: http://ow.ly/d/3qCc
  • Finserv continues to be a very profitable sector. 6 out of 10 most profitable FORTUNE GLOBAL 500 corporations in 2015 are banks. https://twitter.com/GTM360/status/642284454409584641

Neobanks can chant their disruption mantra all they want but their music will stop overnight if their VC funding dries up or if banks cut off their access to banking rails.

Dean Wallace
Dean Wallace - ACI - Global 20 December, 2015, 08:50Be the first to give this comment the thumbs up 0 likes Personally I hope the Neobanks can continue as well as all the FinTechs. They are setting the upper boundaries of what is possible in our industry today. The banks "could" move past self-imposed boundaries but have a deficiency of tools and skills to do that, and the structure of most of their operations would make that a risky and time intensive endeavour. Using your builder example, the banks don't have the cranes, cement mixers, architects, steel mechanics etc, and developing that as a capability is hard - could outsource, could partner, could compete with their customer sure, but not a great business design. Of course the likes of BBVA prove it's doable, but I'm sure you get my point :-)
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 20 December, 2015, 12:05Be the first to give this comment the thumbs up 0 likes

  • It's hard for a technology company to develop the capability to maintain accounts, receive customer payments, make salary and vendor payments, etc., on its own. So, it partners with a bank to hold its money.
  • It's hard for a retailer to develop the capability to manufacture engines, chassis, plan routes, etc., on its own. So, it partners with a transport company to move its goods.
  • "AirBnB is the world's largest hotel chain but it doesn't own a single hotel".

I could go on and on but it's common for a company in any industry to partner with external entities EVEN TO ACQUIRE A CAPABILITY THAT LIES AT THE CORE OF ITS BUSINESS. 

If it's not great business design for banks to partner with external entities to acquire a capability to expand into a new realm (construction), then I don't know too many examples of a great business design in any industry.

Dean Wallace
Dean Wallace - ACI - Global 20 December, 2015, 12:15Be the first to give this comment the thumbs up 0 likes My comment regarding not being a good business design refers to competing with your customers. Sorry for any confusion.
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 20 December, 2015, 15:23Be the first to give this comment the thumbs up 0 likes

TY for clarifying but competing with your customers is also not an uncommon business practice. I've come across it in various industries where a single company changes its position in the value chain from one deal to another e.g. investment banking (buy side, sell side, merchant banking) and engineering (manufacturer, bought-out supplier, prime contractor, sub contractor).

I draw a line at threatening the death / disruption of your customers. Call me old-fashioned but that's a terrible way of doing business. I know many neobanks / finsurgents do that. But, thankfully, at least some of them seem to have realized the folly of their ways, going by a few quotes of their CEOs in the WSJ article I cited above e.g.: 

QUOTE

Brett King, CEO of mobile-banking app Moven, wrote in 2010 that “the death of retail banking is here.” Now, Mr. King counts meetings with potential bank partners among his biggest priorities.

ENDQUOTE

Dean Wallace
Dean Wallace - ACI - Global 20 December, 2015, 15:55Be the first to give this comment the thumbs up 0 likes I understand your position! It's been an interesting week on Finextra. Been a pleasure being part of the discussion and I've learned a lot too. Come on 2016 :-)
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 21 December, 2015, 11:45Be the first to give this comment the thumbs up 0 likes

Re. my comment "I'm sensing a common belief that use of mobile banking, PayPal, SQUARE, ApplePay, etc. means disruption. I totally disagree.", Chris Skinner's blog post - "Fintech is not disruptive, as banks adapt and thrive" - would seem to agree: 

"In fact, the more I think about things the more I realise that most fintech is supplementing the bank industry rather than disintermediating, disrupting or displacing it. P2P is just acting as the credit risk department of financial institutions; Square is just an SME acquirer on behalf of card companies;..."

Dean Wallace
Dean Wallace - ACI - Global 21 December, 2015, 12:00Be the first to give this comment the thumbs up 0 likes Depends on your definition of disruption. Disrupting what? The banks? Or the way the industry works? Or something else?
Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 21 December, 2015, 12:13Be the first to give this comment the thumbs up 0 likes

My definitions of disruption, who's disrupting whom / what, etc. are all unchanged from the previous contexts in which I'd used them viz.:

"None of this sounds like disruption of banks by fintech." ; "I draw a line at threatening the death / disruption of your customers."