Revolution or evolution, which will the fintech sector deliver?
The alternative finance sector, and indeed the fintech sector more generally, has gotten pretty comfortable with the notion that bank collaboration is the way forward. Where once industry rhetoric whirled around the concept of “beating the banks”, today that idea has become somewhat passé. Indeed the very idea of directly taking on the banks is these days mostly dismissed as exuberance, at best, naivety at worst.
But according to a new report from Starling Bank, that way of thinking plays right into the hands of the banks. Starling is a new digital bank, with a banking licence under arm, that’s poised to launch early next year. The company clinched $70m in seed funding from a single investor (Harald McPike) in January of this year. Anne Boden (pictured above), Starling’s charismatic CEO, wrote the following in a foreword to the report: “Fintech had a clear purpose at its inception ‒ putting the customer, not the product, first. But this report shows the revolution is still more bark than bite. If it is revolution rather than evolution that we want, if it’s the car rather than faster horses that we want to race, then 2017 is going to be a pivotal year for fintech.”
The report – which was co-authored by Guy Shone, CEO of Explain the Market – argues that fintech firms will be forced to rediscover their disruptive roots in 2017, primarily by shifting focus back to the customer. “As a fintech community we need to listen to the public without finishing their sentences,” said Shone. “… It appears fintech has lost sight of its original purpose – to release the stranglehold of non-competitive banks over consumers.”
Broadly, there were four key themes in the report: the poisoned chalice that is bank collaboration, the anti-competitive role being played by government, the lack of customer centricity, and the need to established greater trust and transparency.
Whatever happened to beating the banks?
The Starling report clearly identifies a step-change in dynamic which few within the fintech space have been so bold as to address: the potentially harmful effects of bank collaboration. “… As we move into 2017, it’s vital to take a look behind the scenes where the structures of the industry are shifting and setting many on a new trajectory – one that may serve the UK’s biggest and oldest banks rather than competing against them,” writes Shone.
His fear is that the opportunity to genuinely increase competition within the financial services market is steadily disappearing into a cloud of partnership initiatives. He points out that “giant corporations” now dominate one in every four fintech deals.
The report states that increasing levels of bank ownership within the fintech space gives the illusion of disruption, “while the same corporate entities embed their control on the marketplace”.
The mentality of taking on the banks certainly seems to have faded in the past few years. Alternative lenders across various geographies have hitched their wagons to partner banks in an effort to plug into formidably sized customer bases, or to gain access to cheaper funding channels. OnDeck, for example, hooked up with JPMorgan Chase in December of last year. Citi has been one of the largest investors in the US marketplace lending sector to date. But Starling thinks little of these supposedly groundbreaking partnerships: “To state the obvious, because it isn’t stated often enough, the biggest banks don’t really want more competition. It is the last thing they really want.”
Thanks, chancellor, but no thanks
The UK government has been widely lauded for having made a fintech paradise of London, through a dazzling range of supportive initiatives. To name but a few of those that have helped to spur on the growth of the alternative finance sector: the innovative finance ISA, EIS/SEIS, bad debt relief for P2P investors, the investments of the British Business Bank and the mandatory bank referral scheme.
But Starling struck up an unfamiliar tune by criticising the role played by government in the fintech sector. “The other key tenet of UK government policy is to encourage ‘collaboration’ between big and small, old and new, at every opportunity,” said Shone. “This creates an undertow that is hard to swim against.”
He continued: “The government has done much to help create a positive regulatory environment for technology startups and says fintech is integral to their strategy for making financial services more competitive. But on closer inspection most of this so-called new competition helps our biggest banks rather than competes against them. Billions in new investment is still controlled by the groups who for decades have been part of the problem. A real revolution needs to prioritise genuine disrupters and those brands who really put customers first.”
Back to the customer
Starling believes that the business models employed by the majority of early-stage fintech outfits have led to a dwindling in customer centricity. “In the rush to win investors, the need to develop skills and expertise that impact the customer has lost priority between 2013 and 2016,” states the report. Starling cites TransferWise misleading customers on pricing and the Lending Club fiasco as examples of this mismatch.
But Starling is convinced that customers are becoming more savvy by the day, and won’t be the fools of the fintech space for much longer. The report states that the majority of customers do not need educating, and points to the fact that 88 per cent of the nation now claim to “hardly” or “never” run out of money before payday. It goes on to state that the cross-selling model employed by banks makes less and less sense in a world where customer scrutiny is intensifying. “Those firms demanding investment or partnership support in 2017 will need to demonstrate customer capability,” says Starling.
Trust and transparency
The old watchwords of the fintech sector – trust and transparency – pop up frequently within Starling’s eyebrow-raising report. The digital bank states that customer centricity is the key ingredient in building trust among customers. The report calls for more “honesty” from fintech companies, as well as greater “clarity about corporate ownership and how firms make money”.
One of Starling’s three calls to action relates directly to this point. The soon-to-launch bank wants to see more transparency around government sponsorship in fintech, in order to ensure that the needs of customers remain at the forefront of industry minds. “Firstly, we would like to call for action at category level – asking the fintech industry to join us in examining who controls investment and who stands to benefit the most from the billions being poured into our sector,” says Starling. “Moreover, we would like to ask that this include an overview of government sponsorship and discussions with political bodies such as the Treasury to ensure the maximum can be done to encourage true competition and customer-first products.”
For now, Starling has the luxury of being able to critique from the sidelines, having already clinched $70m in pre-launch seed funding. But with its full launch looming, the pressure will soon be on for the bank to deliver a brand of disruption that is worthy of the high ground.