How FinTechs disrupts retail banking (and other financial services)

Steve FoxThe growing FinTech sector is a hive of innovation that is starting to deliver consumer services which challenge ideas about the role and function of traditional banks and other financial service providers.

Customers have ever-increasing expectations when it comes to digital services. Regardless of industry or provider, consumers demand engaging content with useful and simple functionality and a great user-experience. It is the new entrants, the disrupting FinTechs who appear to be most successful at meeting this need at present.

The impact of disruption by FinTech companies should not be underestimated as they are already meeting this customer need. Start-ups also have the advantage of agility and speed and McKinsey estimates that, fuelled by data-sharing, between 10% and 40% of banking revenue could be at risk from FinTech by 2025.

In addition, the values underpinning the open banking framework – ease and transparency of customer access – are proving to be a catalyst for new entrants into banking and financial services.

A good example of customer-focused disruptive innovation is in the rise of social media banking – where transactions and purchases are made through bots on social networks.

The latest FinTech Adoption Index, from professional services firm EY also suggests that FinTechs are in favour because they enable customers to set up with as little as a single click. The top reason given for using a fintech service by respondents to the survey was ease of account set up. More than 43% said this was the reason they turned to a new provider.

In that light, Experian’s recently-commissioned Forrester Consulting study – with 380 financial services C-level and functional leaders – makes for concerning reading. 73% of respondents believe traditional business models will disappear in the next five years due to digital transformation. This shift presents opportunities for competition and new entrants, and poses a threat to incumbents.

In addition, 70% admitted they’re currently ineffective at delivering an optimised digital customer experience.

Against such a position, how do financial institutions claw back any advantage they might have already lost?

The battle for market share, and to benefit fully from the opportunities presented by data sharing, will likely come from brand – and how trusted and received it is.

It is expected that FinTechs will use reduced costs to acquire customers and create innovative and simple services that will quickly build brand reputation.

For traditional players, creating added-value services that build on existing relationships will be critical in helping retain existing customers. They will also have to understand how brand identity can help build on a reputation for trust and high-levels of security. Doing so will help to secure confidence from the consumer and to develop new relationships.

Of course, these opportunities only really exist if firms are prepared to engage in a way that focuses on the needs and expectations of the consumer. Brands that provide quality, secure services in multiple disaggregated ways across different channels could, quickly, start to dominate those areas.

If that’s the case, the question for the others will be how do they catch up and try to gain the competitive advantage? A positive answer to that might be difficult to find. But, in order to succeed – traditional organisations must try – and soon.

What drives loyalty of different customer groups?