Just over half the world’s banking customers now interacting directly with FinTech companies, according to a new report from consultancy Capgemini. The figure is a little lower in Australia, at 42 per cent.
FinTech might be flavour of the month, but it is not all good news. The inaugural World FinTech Report says that very few FinTech startups have “managed to use their agility and innovation to fill gaping holes in the customer experience left by traditional firms with viable business models that achieve scale and distribution.”
The report also says that many FinTech investments have not paid off.
“We have seen a plethora of investment and activity in innovation labs, hack-a-thons, building internal FinTech teams, and even acquiring start-ups,” it says. “And while there have been a few exceptions to the norm, most of these investments have failed to deliver their desired outcomes.”
“Too often, innovation investments are too disconnected from the business or too close to the business and handcuffed by legacy culture.”
The report is based on a survey of more than 8,000 financial services end users in 15 countries, including Australia, and over 100 interviews with senior executives of financial institutions and corporate users of financial services.
It was conducted in conjunction with LinkedIn and Efma, the European Financial Management Association.
It’s a warts-and-all study, which is good to see. So many of these types of documents seem to be primarily produced for marketing purposes, but this one is based on real research and draws some succinct conclusions.
It starts by talking about the hype of FinTech, but points out that investment is now starting to slow.
It poses some real questions:
- What will be the real impact on the industry?
- Was it all hype or do they have viable business models to compete with traditional firms?
- What do customers think about these new players?
- Based on customer reactions, how should traditional firms respond?
- Do they have the ability to be agile and more innovative?
- What is preventing traditional firms from replicating the innovation solutions and services being provided by FinTechs?
- Are we truly seeing a disruption and revolution in the financial services industry or more of an evolution?
- Are the recent collaborations and partnerships between FinTechs and traditional firms a sign of more to come or could we be looking at completely new business models and a platformification of the business?
All pretty reasonable questions, given the hype. The 48-page report does a reasonable job of trying to answer them.
It says that overall customer experience and trust remain low.
“Only 23.6 per cent of customers say they trust their FinTech provider, compared to 36.6 per cent for traditional firms.”
“Customers noted traditional financial institutions still hold some advantage over FinTech providers when it comes to fraud protection, quality of service, and transparency.”
And less than half of executives of traditional financial institutions are confident in their organisation’s FinTech strategy.
“This is not surprising given only about one-third (34.7 per cent) say they have a well-structured or proactive innovation strategy in place that is embedded culturally,” the report says.
“The risk-averse nature of traditional firms also makes it difficult for them to create cultures that prioritise innovation, and 40.3 per cent of executives said that theirs is not conducive to innovation.”
Philip Gomm, Industry Practice Leader for Banking and Capital Markets at Capgemini Australia, says that is also the case locally.
“Australia’s FinTech startups are able to attract substantial private investment, and we also see strong institutional appetite from banks looking to take equity in startup FinTech businesses with promising solutions,” he said.
Mr Gomm says that Capgemini estimates there has been a total of $2 billion in investment in Australian FinTech companies since 2009.
“And it’s coming from many places – angels, VCs, traditional investors, financial institutions. The rise of FinTech has been aided by a perfect storm, created by increasing customer expectations, expanding VC funding, reduced barriers to entry, and increased pace of technological evolution.
“This is especially true in digital payments, where substantial inroads are being made to reduce cost, increase efficiency and deliver the seamless customer experience we now demand from our increasingly digital financial service providers, while payment services continue to migrate to customer mobile devices.”
Despite some of the problems, investment in FinTech is growing strongly at 54 per cent a year globally. The report found that traditional financial institutions are increasingly pursuing a wide range of strategies in response to the arrival of FinTechs.
“A majority of financial institutions (60 per cent) now view FinTechs as potential partners, but nearly the same percentage (59 per cent) are also actively developing their own in-house capabilities.
“Beyond partnership and in-house development, executives are exploring a full range of models, whether it be Investment in FinTech (38 per cent), partnering with educational institutions (34 per cent) or setting up accelerators (30 per cent), while a much smaller percentage (19 per cent) are acquiring FinTechs.”
Australia’s big four banks have all made investments in FinTech. Westpac and NAB have their own VC funds, both of which have made FinTech investments, and they and CBA all have internal teams that they have attempted to imbue with a startup culture by insulating them from their traditional bureaucracy.
ANZ has adopted a slightly different. It is the only one of the four to have partnered with Apple on Apple Pay.
“ANZ seems to be still sorting out its FinTech strategy,” says Mr Gomm. “The others are more committed, but ANZ’s deal with Apple shows it recognises the disruption that is occurring, and is developing its own path.”
FinTech will only grow bigger. What issues the industry is facing are essentially teething problems.
“Aiding FinTech firms is the fact that traditional financial services firms have typically faced competing priorities, including increasing regulations, inflexible legacy systems, and siloed channels, adding to operational costs,” says the report.
“Most FinTech firms, meanwhile, embark on their journeys as nimble startups, able to take advantage of next-generation technology without worrying about existing systems or cultures.”
“Plus, they can use already available services in the cloud to save on investment costs. These lower barriers of entry have created a fertile ground for FinTech growth.”