In a report titled ‘Future of Financial Services 2015’, the World Economic Forum (WEF) analyzes the evolving state of the financial industry. The report takes a look at why fintech startups have been successful in gaining traction in the financial services industry as they battle against regional and global banking behemoths.
Helping Consumers Overcome Particular Obstacles
According to the WEF, firms such as Google and Amazon have raised the bar of the public’s expectation of digital services. As such, this has created an environment where the general public doesn’t only have high user experience expectations from technology products, but any offering that has a digital component to it.
Firms such as Google and Amazon have raised the bar of the public’s expectation of digital services
Within the financial industry, this shift of public expectations also exists. The result is that this sentiment poses a threat to financial firms which are unable to meet user expectations. For fintech firms, this has created an opportunity where they can succeed by “helping consumers overcome particular obstacles.”
The report explains that even though fintech firms such as those providing payment or online banking solutions may be limited in their overall offerings, they are able to succeed against incumbents thanks to their ability to help customers overcome obstacles evident in the existing financial industry.
On this, the WEF report explained:
Many innovators have exploited points of friction in accessibility, increased regulatory burden, reduced appetite for risk and issues with user experience and cost (the latter often caused by incumbents’ legacy systems). In doing so, they have widened access to financial services in underserved niche areas. Alternative lenders have grown rapidly by leveraging digital tools and lean processes to radically streamline the loan adjudication process so it can be done in days rather than weeks. This change has opened the door to lending for thousands of small businesses with cash flow needs.
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The WEF report explains that innovation in the financial industry is challenging the existing players along several different areas. Firstly, thanks to innovation, customer behaviors are changing. As an example, consumers are becoming more aware of advantages of cashless payment solutions while investors are using services like robo-advisory making long-term investing easier and more efficient.
Secondly, thanks to startups such as P2P lenders focusing on niches of the financial industry, services are becoming unbundled. This is a disruptive trend for banks and brokers that have spent years up selling customers with bundled services to provide end to end coverage of their financial needs.
Thirdly, new products are being made available to wider audiences. For example, investors can now elect to apportion part of their portfolios in equity crowdfunding or P2P lending platforms. Such asset classes have been unavailable in the past to retail investors and blurs sub-sector boundaries.
Moving Forward with Collaboration
One of the points of the WEF report is that while startups are gaining success in carving out niches by providing more efficient rates or better user experiences, there are difficulties involved in scaling their services to wider audiences. In addition, to provide solutions to more complex problems, innovators may run into increased regulatory demands and higher technology expenses. As such, this constrains their ability to grow beyond their niche markets.
As a result, the WEF report explained that there are benefits for fintech firms to collaborate. On this, the analysis explained: “Incumbents should ask whether this great wave of new entrants would be best viewed as an external R&D function rather than a threat. Innovators can use partnerships with bigger rivals to ensure their ideas are implemented at scale and become widely accessible to consumers – some already have.”
Existing examples of collaboration on marketplace lending platforms. On these platforms, banks are able to partner with startups by sharing customer data as well as lending capital. As an example, the report brought Pandai, a P2P lending platform in China, which is collaborating with a number of large banks and insurers.