Fintech hasn’t just changed traditional banking. It revolutionized that. Over the past decade, the rise of competing technology-first banks like Revolut, Starling and Monzo has sent traditional players frantically modernizing their legacy infrastructure and bringing their offerings into the 21st century.
More than anything else, the fintech boom has put the customer experience front and center, and by doing so, it has shown customers that they have a choice. Existing banks are now dealing with a customer base that expects a certain experience and is ready to move in to find it.
As we head into 2022, it looks like the penny has finally fallen for conventional banks with most national and global banks now focused on technology enough to consider themselves fintech companies as well. They have poured time and money to overcome many of the old problems that left them behind the competitors and now have the technical infrastructure to match.
But it is not that simple. Big banks still have baggage, large numbers of customers and employees, and there are still old problems. Whereas fintech competitors, even the biggest, are designed to adapt, innovate, and integrate.
Put it this way, it’s a lot harder to get around a sixteen-wheeled truck than an old Tesla.
However, the challengers problem remains closely related and stable enough to continue to do what its name suggests.
Both sectors are at a crossroads. The big question is where do they go now?
Traditional banking will have to remember how to innovate
Frankly, it was the inability of traditional banks to innovate that left the door open for competitors in the first place. Now, to get over them – or even join them – they must get past trying to appear like them and actually start to think like them.
They need to look at competing banks that are successful and match what they are doing. If they can do that, the big banks have the resources and credible names to make up for any losses. Customers generally do not tend to worry about who is providing their financial services to them. In fact, one of the main problems that competing banks face is getting customers to use their accounts as primary bank accounts. Trust issues remain. If it’s a big name, traditional banks can provide a really high level of customer experience, they will thrive.
Customers now want more than traditional banking services. It is no longer just about accounts, cards and loans, as each bank offers an offer that is interchangeable with the other. It’s all about a positive user experience, a robust app and online product, and increasingly, an ecosystem of personalized products.
This is where competing fintech brands and banks gain the upper hand. The innovation lies in their DNA. Additionally, they own the technical structures to integrate the services of other fintech brands or offer their own.
See, innovation doesn’t have to mean creating something from scratch. The beauty of what many fintech brands have done is that their services are fully integrated. Through their Banking as a Service (Baas) products, they are making companies that were once competition to peers.
I see this every day at my company AAZZUR as we work with fintech and retail companies to include personal financial services in their user journeys.
A number of conventional banks are already wise in this matter. Lloyds is working with Thought Machine and RBS with 11:FS, to improve its offering by merging with some of the most innovative financial technology companies.
If more traditional banks can combine this level of collaboration and innovation, success is sure to come.
Competitors will start making profits
For the majority of fintech brands and competing banks, profitability should be the next focus. No-profit growth can take you far. Look at Monzo. Despite being a unicorn, it still has to make a £60m funding round, a 37.5% devaluation in its 2019 round, just to keep the business going. Living near the edge is not sustainable. They attract very good investors, so we know that the future strategy will be to generate income and growth.
With established banks finally working together and tech giants looking to enter the fintech space, the already crowded market is about to become more crowded and more competitive.
How, then, will they benefit and continue to challenge?
The first port of call for most competitors is to raise prices or introduce fees. This, however, can prove alienation and elevation often being low. The first paid model from Monzo was withdrawn just 4 months later. It was recently relaunched, with only 4% of users choosing paid accounts this time around. Slightly better performance, only 14% of Revolut users pay for their account. People don’t like to pay for traditional banking, it’s that simple.
As expected, many companies will work this way, but the best option, again, is to focus on BaaS. Either as a provider, offering its own financial services to other companies or by integrating the services of other FinTech brands into their own systems to improve their own offerings.
Take Starling, for example. There are two things that really separate it from Monzo and Revolut. One is that it is consistently profitable. The first to challenge the banks to become so. The other is that it has the most diversified revenue stream. This is no accident. When it finally crashed in 2020, only 45% of its revenue came from card transaction fees – the main source of income for rival banks.
Starling benefits greatly from both sides of BaaS. It offers payment bars to companies like Raisin, SumUp, and MasterCard while simultaneously partnering with other fintech companies like Wealthify and PensionBee to offer its clients a wide range of personalized services.
Given the ease with which most BaaS products can be integrated, its capabilities go beyond just partnering with fellow FinTech companies. It gives any digital retail company the opportunity to offer their own customers services that were previously only the domain of banks.
For fintech companies looking to leave life support in investing and venture capital financing, the BaaS path appears to be the right path. Especially when some of the financial estimates included are worth €6.3 trillion over the next ten years.