Fintech might be revolutionary, or it might not be
Fintech has generated much hype over the past few years and a reality check was inevitable, says Accenture.
Fintech’s promise to transform finance has been stalled not killed and it is too early to judge what its long-term effects will be.
A new report by consulting firm Accenture UK, claims that it was “unrealistic” to have expected fintechs to eat the Too Big To Fail banks in five years and speculates that declining VC investment could have been caused by Brexit and Trump, rather than fintech profitability.
“Whether the Fintech revolution succeeds or not will take time to play out,” the report concluded.
“It will depend on the end state of the evolving market structure, on profitability improving by more than the bow-wave of interest rate increases, and on prices reducing for all forms of banking, from retail to institutional services.”
Despite staying agnostic on the future of fintech, the report said fintechs are currently “stuck” in a catch-22, where investors refuse to give fintechs more funding because their customer acquisition is sluggish, but fintechs are stuggling to acquire customers precisely because they lack the necessary investment.
“The true litmus test for Fintech success is customer acquisition – and this test is yet to be passed,” the report said.
“Analogies can be drawn with the past. In the 1990s, Prudential’s Egg was a fresh direct banking challenger that quickly attracted a million customers. But its marketing costs equalled the savings made from having no branches – and when those costs were reduced, customers stopped joining.”
The report dismissed the idea that China could be the salvation of western fintech, noting that much of the success of Chinese fintech firms owes to powerful parent companies using their vast treasuries to bolster fintech subsidiaries.
It also noted that there were major differences between Chinese and western payments markets, meaning that western fintechs would struggle to vertically scale in China.
“Chinese Fintechs might be meeting the needs of their home markets but are unlikely to have material advantage elsewhere.
“They have predominantly leveraged relationships with their parent and market demographics to overcome the biggest Fintech obstacle: customer acquisition.”
While fintech has proved overhyped it is possible that younger generations, who are more trusting of non-bank alternatives, may drive a seachange.
“Over three-quarters of Generation Z and X respondents in mature countries said they would trust an entity other than a bank for the provision of banking services (compared with zero percent of other segments).
“Incumbents might put this down to the wisdom of age – but it should act as a warning that customer acquisition could be about to hit a point of collapse.”