Fintechs need to ride the new waves
The shift to digital channels, spurned on by the current crisis, is accelerating the demand for quick, easy and low-cost financial transactions, and this might benefit fintechs rather than the incumbent banks.
So said a major report from consultants McKinsey entitled: Detour: An altered path to profit for European fintechs which, when talking about the future of fintechs in these troubled times, point to the fact that up to 20% of Western European consumers say they expect to do more digital banking. And around 80% of customers in these markets have stated that they prefer digital when conducting everyday financial transactions such as checking balances, and money transfers.
Perhaps surprisingly, those people who were asked and belonged in the over-65 category felt the same.
The backdrop to the report is a tougher environment for fintechs, with McKinsey reckoning on a huge 11% economic contraction throughout Europe this year due to Covid-19 and pre-2020 normality not returning until 2023 at least. Fintechs are witnessing VCs pulling their hands up their pockets, business models being criticised and market dynamics shifting. This, said the report, has squeezed the industry and exposed some that will not stand the new, intense scrutiny.
Yet, as the report pointed out, fintechs are not to be seen as fledglings about to be flattened by a major storm. It highlights many of the key fintech advantages such as they are native to the digital arena, they have more efficient cost structures, enjoy organisational agility and, crucially, higher customer loyalty. The genie is out of the bottle, as consumers are now accustomed to quick, easy, low-cost financial transactions - there can be no going back to the bad old days when the traditional banks ruled the high streets.
The report finishes by identifying four emerging imperatives that all stakeholders in the sector, from fintechs and investors to incumbent banks and corporate partners, should consider.
Firstly, is that although there will be some retrenchment, a light finger is needed on the calculator, because money needs to be spent on “...placing bigger bets and directing leadership attention to areas with long-term potential.”
Secondly, fintechs need to exploit their ability to rapidly respond to changing customer needs and take a hard look at their value propositions and roadmaps, and ensure that they reflect evolving customer behaviors and segments, testing and validating new propositions at pace.
Thirdly, company leaders need to take a hard look at their economic model and make adjustments, while preserving the best aspects.
And finally, many of the things on the to-do list could be achieved more rapidly through thoughtful acquisition or partnerships than by organic development. Three areas stand out as likely to see higher activity: next-generation credit capabilities, open data, and distribution collaboration.
And the final word from the report: “Whilst there will undoubtedly be challenging times ahead, speed and a willingness to challenge orthodoxies are necessary to thrive. Fintech companies have shown great potential for transformative impact—now is the time to fulfill that promise.”