Over the past few years, FinTech has become a highly popular buzzword. We speak to Karol Stępień, Business Banking and FinTech expert and executive, to get his thoughts on what has led to FinTech’s rapid rise, and what predictions we’re able to make about this burgeoning sector.
Many consumers already use solutions provided by FinTechs. So what is all the hype about?
There are several reasons for such high interest in FinTech at the moment. For a start, we’re talking about the financial services industry here, which is associated with large sums of money – any market changes around this money will therefore naturally become a hot topic. The other reason is that until fairly recently, banking, insurance and other financial businesses were not areas into which entrepreneurs had access to establish this kind of business activity. Most consumer banks are serious, well-established institutions, steeped in history. The oldest bank which is still operating – Banca Monte dei Paschi di Siena, is over 500 years old.
It is still difficult to launch a FinTech startup and make it generate revenue, but there are now many examples of let’s say regular people, who entered the scene, managed to shake up this traditional industry, and start market change.
Establishing a new financial institution in this traditional form takes a lot of initial outlay on infrastructure and staff to service clients. The FinTech approach is turning this situation on its head. It is still difficult to launch a FinTech startup and make it generate revenue, but there are now many examples of let’s say regular people, who entered the scene, managed to shake up this traditional industry, and start market change. Moreover those examples show spectacular company value increases in a very short time e.g. Revolut – $5.5. bln valuation in 5 years, Chime -$5.8 bln in 7 years and N26 $3.8 bln in 7 years to name just a few.
But these are not the only reasons why FinTech is so popular?
You can open an account on your phone or laptop in a few minutes, which is something that you’re still not able to do in most of the traditional banks – a huge disparity in user experience.
Obviously not. The way Fintechs are providing services is revolutionary in itself. The internet has been around for more than forty years, but it’s only the more recent rise in FinTechs which has led to new ways of servicing in finance. They are seen as a much needed breath of fresh air, telling modern consumers: ‘We understand you’re busy and we’re here to help.’
For a start, they are branchless and simple. You can open an account on your phone or laptop in a few minutes, which is something that you’re still not able to do in most of the traditional banks – a huge disparity in user experience.
It’s a similar situation with tariffs. For example, all polish banks still have all their price lists in the form of a small booklet, pages of text dedicated to the different options. In FinTechs pricing is simple and can be listed in a couple of sentences or bullets.
What’s even more important is that both retail consumers and small businesses are no longer willing to interact with banks’ employees that much as they used to. They want to deal with their financial products on their own and when they want. Rightly so, they feel that their experience should not differ from the service offered to them in other industries like e-commerce, travel, and entertainment. FinTech is clearly rising to the challenge here.
So you’re saying these newcomers are always the best choice?
I think that in the near future there will be further developments in what FinTechs are able to offer small, mid and large corporates.
Not always – it depends. If you need basic products, probably yes. This is because FinTechs are easy, cheap and accessible on the move. If you’re interested in getting a mortgage – probably not at this stage. If you run a company which hires 200 people and would like to be serviced by FinTech, then in general this is also not a good choice and not possible in most cases. The needs of such a company are much more sophisticated than a FinTech is able to offer. But I think that in the near future there will be further developments in what FinTechs are able to offer small, mid and large corporates. It is totally feasible to provide full fledged corporate banking solutions to these clients via mobile or web.
How popular are these services then?
They are definitely gaining in popularity. Although the USA is leading in investments in this area, only 23% of their SMEs currently embrace financial technology platforms. In contrast, 61% of Chinese SMEs have adopted at least one FinTech service. From my last research for one of the projects that I was working on, over 90% of entrepreneurs in CEE have never heard the word FinTech and barely any of them use these kinds of services or know their providers.
Could you explain what the current FinTech landscape looks like?
Well, first of all, I would say that we should look at it as being more of an ecosystem, rather than specific companies. The ecosystem is focused on delivering financial services in a convenient, tech backed way. In the ecosystem there are IT solutions providers, big techs, mature financial institutions experimenting nowadays a lot with building their own FinTechs, investment funds, venture builders, corporate venture capital and also people that simply have a brilliant idea and are trying to make a billion dollar company out of it – unfortunately those guys are facing the biggest challenges.
They lack resources like time, money, people and technology, but they know all areas of the financial services industry very well including insurance, consumer finance, business banking, payments and others. Thanks to this knowledge from the battlefield, customer insights and in many cases a vast network of other professionals related to their area, they have arguments in place to build the most promising FinTech startups.
So who is building FinTech companies?
When imagining a startup founder, a student in a hoodie often comes to mind, tapping away on a laptop keyboard all day long, but the reality is different. Many researches have shown that successful FinTechs are being built by experienced industry professionals. They often have a background in financial services consulting and respectively: banking, insurance, leasing, etc.
Klarna, a FinTech being evaluated for $5.5 bln was founded by Sebastian Siemietkowski, who gained his experience and insights to build his future business in a vindication company. Now Klarna assumes stores’ claims for payments and handles customer transactions, thus eliminating the risk for both the seller and the buyer. Even the age of startup founders is often different to what you might assume. MIT researchers, along with Northwestern University’s Kellogg School of Management and Javier Miranda of the US Census Bureau, looked at the ages of entrepreneurs who started companies in the years 2007 to 2014. The average age of a founder who went on to hire at least one employee was 42. The average age of founders of the most successful startups—those with growth in the top 1% of their industry—was 45.
So what can companies do to boost their FinTech efforts?
Executives at traditional financial firms believe that their FinTech colleagues provide a better experience in most areas of interaction, including convenience, ease of use, transparency, and value. So the industry is actively trying to learn from them, or even in some cases to acquire them. A very good example of new business approach absorption is BBVA’s (the second biggest Spanish bank) acquisition of HOLVI (a Fintech with Finnish roots). Another example, this time of a traditional bank building an internal solution, is Danske Bank with MobilePay. The solution was created by a specially dedicated vehicle to do it in a smart way and without the bank’s legacy influence. The success is so tremendous, that now half of all Danes are using the app.
What are the challenges in FinTech innovation absorption by traditional banks?
The first challenge is the mindset of people responsible for such an absorption. If they are entrepreneurial minded and have the force and resources to implement the change, then we are in a half way to success. It is good to remember that, whether buying or building the fintech solution, there is legacy-free activity needed. All corporate regulations, never ending internal consultancies and alignments will probably kill the initiative and demotivate a well established team. Last but not least there must be a match between people trying to build the target solution or between the team, and externally bought fintech.
So what should be done next?
According to McKinsey “About 80% of financial institutions implemented a FinTech partnership.” I think this is a beneficial approach for both corporates and individuals who want to change the world in this industry. Almost every well known financial institution has its own labs, accelerators and others. Another important factor is the possibility to experiment while building the solution. So surveys with clients, prototyping, evaluation and the same process over and over until you find the right value proposition. But the most important factor is that you have to have the right people on board to run this kind of project – it’s vital to have people with entrepreneurial experience and the right skills.
What do you think will be the most important trends in this area in the coming years?
I think that more and more experiments will be carried out by banks internally. At the same time, more institutions will realize that having an internal innovation lab or accelerator is definitely not enough to make this kind of initiative a success. I also think that the effort and investment will rise significantly in this area. This is because more board members will realize that they can dramatically improve their banking business model through the creation of their own FinTech model, without the need for long internal discussions and alignment among spheres of internal influencers.
Clients will push even more for more digitized solutions and service channels because they are more effective, simpler and much more accessible than services provided by banking representatives. On the other hand I think that expert services in banks will be paid e.g. the possibility to use the skills and advice of a trade finance or treasury specialist will be priced and not available as widely as it is now. New waves of successful FinTechs are likely to be built by tech companies or alliances between companies and individuals not connected to any particular finance group, providing skills to build new challenger banks or other FinTechs.
Thank you for the conversation.
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