Can fintechs maintain their edge in an industry that won’t stop disrupting itself?

17 November 2017

The financial services industry has entered the Age of the Customer -- in this era, the singular goal is to delight. With offerings that are faster, better and cheaper, new fintech entrants have the edge over traditional institutions who struggle to keep pace with consumers’ rising expectations around service. Yet this is not the first or last stage in the industry’s evolution. Just as telephone banking was once viewed as peak disruption, so too will today’s innovation eventually become the standard in financial services.

What will become of today’s new entrants as they scale and mature? The answer largely depends on why a particular fintech company is winning with customers today -- a hyper focus on problem-solving.

If customer review site Trustpilot is used as the litmus test for customer satisfaction, then clearly banks and other traditional financial firms are falling short of the mark. Looking at the UK’s Trustpilot rankings in the Money category, not a single bank appears in the top 100, and their ratings range from average to poor. Fintech entrants like Transferwise, Funding Circle and Zopa, on the other hand rank highly in their respective categories.

So how is it that such young companies have elicited such positive responses from consumers, beating out institutions with decades of experience and customer insight?

The advantage fintechs have over banks is that their products are more narrowly focused and are supported by modern infrastructure, new delivery mechanisms and powerful data analytics that drive continuous user-centric improvement and refinement. Still, they’ve had to clear the high barriers of onerous regulatory and capital requirements, and win market share from competitors with entrenched customer bases.

The halo effect of innovation and enthusiasm of early adopters, hopeful for the promise of something better, has buoyed the success of new entrants and spurred the proliferation of new apps aimed at addressing any number of unmet financial needs. This of course cannot continue unabated and we’re already approaching a saturation point that will spark the reintegration or rebundling of digital financial services.

In fact, a finding from a World Economic Forum report, Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services, in August this year stated that: “Platforms that offer the ability to engage with different financial institutions from a single channel will become the dominant model for the delivery of financial services.”

Whether a particular app or digital offering will be rolled up into a bank once again or survive as a standalone in this future world of financial services will depend on whether the product or service they provide is considered a vitamin or a painkiller.

Vitamins are the optimizers. These nice-to-haves like PFM (personal financial management) apps certainly make life easier for consumers, but don’t have competitive moats wide enough to prevent banks from replicating on their own platforms in fairly short-order.

For the painkillers, a different fate is in store. These are offerings that are winning either on the basis of extreme cost efficiency (the cheaper-better-fasters) or by solving one incredibly difficult problem. Oakam belongs to this second category of painkillers: we’re making fair credit accessible to a subset of consumers who historically have been almost virtually excluded from formal financial services.

The likely outcome for the cheaper-better-fasters, like Transferwise in the remittances world, is acquisition by an established player. They’ve worked out the kinks and inefficiencies of an existing system and presented their customers with a simpler, cheaper method of performing a specific task. However, their single-solution focus and ease of integration with other platforms make them an obvious target for banks, who lack the technology expertise but have the balance sheets to acquire and fold outside offerings into their own.

Integration into banks is harder to pull off with the second category of painkillers because of the complexity of the challenges they are solving for. In Oakam’s case we’re using new data sources and methods of credit scoring that the industry’s existing infrastructure isn’t setup to handle. In other words, how could a bank or another established player integrate our technology, which relies on vastly different decision-making inputs and an entirely new mode of interacting with customers, into their system without practically having to overhaul it?

For painkillers who succeed at cracking these difficult problems, the reward is to earn the trust of their customers and the credibility among peers to become the integrators for other offerings. Instead of being rebundled into more traditional financial firms, these painkillers have the potential to become convenient digital money management platforms, enabling access to a range of products and services outside of their own offering.

Self-described “digital banking alternative,” Revolut was first launched to help consumers with their very specific needs around managing travel spending, but today has offerings ranging from current accounts to cell phone insurance. While some of their products are proprietary, they’ve embraced partnership in other areas, like insurance which it provides via Simplesurance. This sort of collaboration offers an early look at the shape of things to come in finance’s digital future.

One might ask how the digital bundling of products and services differs from a traditional bank, with the expectation that the quality and customer experience will diminish as new offerings are added. A key difference is PSD2 and the rise of open banking, which will enable closer collaboration and the ability to benefit from the rapid innovation of others. What this means is that an integrator can remain focused on its own area of expertise, while offering its customers access to other high quality products and services.

At Oakam, this future model of integrated digital consumer finance represents a way to unlock financial inclusion on a wide, global scale. Today, we serve as our customers’ first entry, or re-entry, point into formal financial services. The prospect of catering to their other financial needs in a more connected, holistic way is what motivates us to work towards resolving an immediate, yet complicated challenge of unlocking access to fair credit.
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