According to the study conducted by PwC, since 2011 the number of fintech companies has risen by more than 50%. For banks, this could result in a decrease of revenues in future, as based on the Goldman Sachs equity research report from March 2015, FinTech firms might capture up to USD 4.7 trillion in annual turnover from well-established financial services companies.
In order to avoid this, traditional financial institutions ought to invest substantial resources to catch up with the level of services provided by these newly arrived companies. This means not only offering same or better services in a customer-friendly way, but more importantly also to reinvent the way they are communicating with their actual and potential clients, and looking for new and customer-appealing marketing channels.
Firstly, let’s take a look on what the FinTech companies are, how they operate and what channels they use to communicate with customers. FinTech is an abbreviation from “Financial Technology”, and refers to companies offering financial services using modern and innovative technologies. These can include companies providing financing services such as crowdfunding or peer-to-peer lending, asset management services (e.g. social trading, robo-advice), payments services (for instance alternative payment methods, blockchain, cryptocurrencies), and other kinds of services (such as insurance). As these services are usually provided by large banks and financial institutions, FinTech companies are considered to be their direct competitors.
What added-value do these, usually small, companies offer to steal customers from multinational financial institutions? The answer may be in their focus on customers’ needs and simplification of processes that lead to a financial service purchase. Also, design plays a key role as well. As most of the times the customers interact with the companies through the website or an app, strong focus has to be put on user interface, with easy-to-use layout. By combining these factors, FinTech companies have been able to attract significant attention from mainly millennial customers. Another advantage that favours these start-ups over large banks is the lack of regulation imposed on FinTech companies. This fact enables them to act almost freely and quickly react to changes in customer needs, without worrying about acting in accordance with regulations.
By benefiting from the use of new technologies, FinTech companies make financial services more efficient, providing faster and more convenient services than large banks and thus attracting a notable amount of attention. But they are not only attractive for customers, but for investors as well. According to a report by Accenture and the Partnership Fund for New York City, in 2008 the total amount of funds invested into FinTech venture companies was USD 1 billion. In 2013, the amount tripled to USD 3 billion and this funding has rapidly increased to USD 13.6 billion in 2016. Currently, there are more than 20 FinTech firms valued over USD 1 billion. These numbers just confirm their future potential and position as important players in the financial services industry.
So far, a lot of these companies have attracted an enormous amount of attention, which however was not caused only by simply dedicating significant financial resources on marketing activities. In fact, the worldwide sensation about new, technologically-based financial services providers caused that the pioneer FinTech companies regularly appeared in all kinds of newspapers, magazines and went viral on social media.
As many others saw a potential in this new subsector as well, the number of FinTech companies has significantly risen, offering either same services or developing new.
Situation in UK
UK is considered to dominate the European FinTech industry, with four largest FinTech firms headquartered in UK valued at USD 18.5 billion, per the report by GP Bullhound. It has more companies valued over USD 1 billion than the rest of the Europe combined. Also, out of all investments into FinTech industry in EU last year, UK accounted for 2/5ths. of the total amount. In the first half of 2017, FinTech firms based in UK raised USD 564 million, which ranks UK to a third place globally, behind US and China. At the current pace of growth, this industry will soon become an important contributor to the economy and employer, as according to the report by UK government, the FinTech industry contributes by more than USD 9 billion to the economy and currently employs over 60,000 people.
Subject of concern for these companies might be the result of Brexit negotiations, but as most of the investments this year into FinTech in UK came from abroad, the investors probably do not consider Brexit as a serious threat for FinTech companies. However, what could negatively impact this industry are regulations that might be imposed on these companies, which could, based on the level of regulation, result in the slowdown of the industry.
Among the most popular FinTech services is peer-to-peer lending. Headquartered in The City of London, Funding Circle is one of the largest UK online platforms aimed at connecting investors and businesses. Since its establishment in 2010, the company raised about GBP 250 million of equity and lent more than GBP 3 billion to 32,000 small businesses around the world. Investors are attracted by interesting return and another form of diversification, businesses on the other hand are attracted by an easier access to the capital and lower interest rates than would be provided by banks.
Another large FinTech company is TransferWise, which was established in 2011 and can be described as a provider of international money transfers. It is valued over USD 1 billion and appeals to potential customers by lower costs of money transfers than banks.
FinTech industry covers also digital currencies. Among largest player in this segment is Blockchain, which is one of the largest platforms for digital assets. It provides wallets for digital currencies and engage in their international transfer. Currently, there are more than 17 million wallets stored by Blockchain, and the company daily processes more than 160,000 transactions.
These were just examples of how wide the FinTech industry is, and there are many more kinds of financial services provided by these firms.
In their marketing strategies, all of them try to attract customers by promoting themselves as reliable, fast and low-cost providers of either services already offered by large financial institutions which are usually more expensive, or new kinds of services. All marketing of their services is done mostly via online channels, through social media and with the help of media.
Strong and fast development of FinTech industry has put a lot of pressure on banks in recent years, whose reactions vary. So far, there could have been seen three general ways how large traditional financial institutions react to the rise of FinTech, based on the report by PwC.
Firstly, by monitoring the industry and looking for emerging winners among FinTech firms, they afterwards try to replicate the business model and offer it using similar channels. This approach mitigates the risk of dedicating financial resources on development of projects with uncertain future, as all they have to do is to copy the winners among FinTech industry.
Another way financial services companies use to compete with FinTech industry is through acquisitions and partnerships. Acquisitions, in particular, allow banks to gain access to new technologies, which they can implement into their own services and IT landscape. Downside of this approach is the possibility of difficult integration of acquired company. Partnerships allow banks to work together with start-ups, resulting in a mutually beneficial exchange of knowledge.
Finally, the third way is to simply invest significant resources into modernizing IT infrastructure in order to replicate approach of FinTech companies. Still, these financial institutions are large and it can be hard for them to be as agile and flexible as small FinTech firms, as reported in analysis by PwC.
As a result of these activities and to comply with FinTech start-ups, large banks, in their marketing activities and communication with actual and potential clients, have begun to use social media channels and internet in general to promote their services in a much larger scale. Also, to catch up with the start-ups, they focused as well on offering and providing different kinds of services through apps and online.
Based on the current trend it can be assumed that the importance of FinTech industry will significantly rise throughout the next decade, with many FinTech companies becoming strong players and direct competitors to the traditional banks.
These traditional financial institutions will face several challenges. Not only they have to be able to quickly and flexibly react to market changes, they ought to readjust their overall marketing strategies and the way they approach their customers. And in the core of all of this should stand digital technologies, which are shaping the way we are using financial services.