By Richard Prime on Monday 13 February 2017
On paper, banks have every advantage over fintech companies: greater manpower, deeper pockets, established names and longstanding reputations. The trouble is that it isn’t really a paper world anymore, but a digital one – and the banks have been slower to capitalise on the resulting opportunities. The industry is changing, and not to their advantage. Over the past decade, 2000 bank branches closed, and it’s easy to see why: fintech companies can provide a nimbler, more personalised, and adaptable offering, and are well-poised to fill the widening gap in the market.
To their credit, banks seem willing to recognise this. Research from PwC indicates that 83 per cent of financial services executives believe that standalone fintech companies may cost them some of their business, and 75 per cent identify the increased focus on the customer as the most important aspect of fintech.
Although the banks have taken steps to catch up, fintech companies continue to lead the way in customer experience.
Fintech companies are ideally positioned to capitalise on this because they realise that there is far more to financial services than mere finance. Being, in some instances, three hundred year old plus institutions, banks have plenty of resources. But when large, centuries-old institutions make improvements to customer care, they tend to do so slowly. What’s more, this can cost them: a report by KPMG Nunwood indicates that the biggest four banks, Barclays, RBS, HSBC and Lloyds, will miss out on some £3.7bn between 2015 and 2018 because of their sub-par experience offerings. Tellingly, none of these banks made the Top 100 Customer Experience Excellence index.
This is good news for fintechs: they may not be able to compete on resources, but they can certainly compete on customer care. Customers no longer have to go to a bank for a loan, an invoice finance arrangement, or an overdraft. They have greater choice and higher expectations – and fintech companies are often better able to fulfil them.
Peer to peer lending platforms such as Funding Circle made it possible for small business owners to complete the loan application process online for the first time. Unburdened by legacy IT systems and expensive branch networks, credit assessments can be delivered for a fraction of the time and expense. In niche markets such as recruitment, contract finance platforms like Sonovate have made it possible for agencies to launch a contractor division within a day – where it might have taken five years with a bank.
The best fintech companies innovate in this vein: they look at the customer’s priorities and requirements and tailor their offering to meet them. They take due diligence seriously, but they’re geared towards finding a solution instead of finding reasons to say ‘no’.
Of course, technology is also important to the success of fintechs – it’s in the name, after all. Where an institution might offer an online banking portal to its consumer customers, it often won’t offer much in the way of software to its business customers. They’re less able to properly invest in technology because they have to consider legacy systems, complex regulation and bureaucracy. Fintech companies, being largely cloud-based, are better equipped to manage processes and transactions online. Where a bank might not offer a company the use of a mobile app, it would be rare for a fintech company to not have one.
The use of technology also enables transparency – which significantly influences customer service. Fintech companies can typically provide a fuller breakdown of financial data, which they can present in a clear, digestible way on intuitive online platforms. Challenger banks such as Monzo offer pre-paid cards that link to mobile apps on your phone, providing a real-time log of all payments – which can be filtered according to location, cost, and category. On the other hand, banks typically don’t update your statement until they post their ledgers days later. Their platforms are often slow and opaque, with less thought spent on the user experience.
It's easy to describe the relationship between fintech companies and banks as an either/or proposition, with the former providing superior customer experience and the latter providing superior financial clout. But more forward-thinking institutions recognise the gaps in their offering that fintech companies can fill, and are either integrating their ideas or forming partnerships with these firms. RBS began collaborating with Iwoca and a number of other fintech lenders in 2016, and Santander UK has formed a new relationship with Kabbage, which supplies faster funding to small businesses.
This is the best path forward for banks and fintechs alike: while the latter will always struggle to dominate territory that has been owned for centuries by institutions, they can supply the ideas and the impetus to drive customer service that banks have so often lacked.