By Felicia Rosenzweig, Partner, Prophet
Are you one of the many who believe that Fintech has (finally) ‘gone mainstream’? The April launch in the UK of Innovative Finance ISAs — Individual Savings Accounts enabling individual investors to put money into peer-to-peer (P2P) lenders on a tax-free basis — would certainly support your position. Even if consumers don’t know the Fintech sub-category by name (and don’t need to), there’s no denying that new options abound for just about any financial service, especially in payments, crowdfunding, peer-to-peer lending, and robo-advising.
With many Fintechs now proactively building their brands with the masses, you might expect traditional financial service players to be a bit nervous, but most appear to be rather comfortable. After all, the established guys have spent years, if not decades, building their customer relationships and their reputations as ‘stable, trusted providers’, and they are investing in many of the Fintechs directly. Surely it would take quite a while, and quite a bit of money, for any upstart niche player to wage a substantive challenge. But that view misses the bigger point on what this next phase of Fintech evolution could mean for the financial service establishment.
Let’s take a step back to consider the humble Fintech. It’s got shiny new operating and CRM systems that haven’t been cobbled together from legacy infrastructure and/or messy M&A. It’s comfortable with continuously evolving technology because it was born that way. It focuses on doing a few things very well because it never promised anyone otherwise. It’s comfortable making mistakes because it knows mis-steps will yield valuable learnings. It anchors on creating tempting experiences to drive acquisition versus building barriers to stem attrition. It’s accessible to more people, as it has changed the rules on eligibility. It’s constantly reinventing because it has to do that to be relevant.
And the traditional financial service player? As mentioned, it’s perceived as relatively stable, with a storied heritage, deep pockets, and lots of employees. It has a well-established customer base to which it offers broad product and service offerings, often via physical locations, as well as online. It’s got rigorous standards and bags of risk and regulation experience, with a compliance team approaching the size of a small country.
In previous eras, the focused newer companies and the broad traditional companies would coexist relatively peacefully, as they weren’t after the same customers (and digital technology hadn’t levelled the playing field). But times have changed, and everyone is now fighting for the same increasingly savvy customers. In this context, the Fintechs are boldly taking on the traditional players and each other, but many of the traditional players seem to be employing variations of a different strategy: “Invest and co-opt”. Simply stated: ‘Fintech’s have better technology, so we should invest in making them successful and then acquire or partner with the best ones.’ An example of this strategy in action is the partnership between Santander and iZettle, a Stockholm-based Fintech enabling businesses to take card payments. Santander invested in iZettle through its InnoVentures fund, and it now features its partnership with iZettle on its business banking site; in contrast, Santander seems to be invisible on iZettle’s site. This strategy may be the best approach in terms of offerings, but it leaves much to be desired from a brand perspective, as many of the brand equities of the Fintech are challenging and time-consuming to transfer to the traditional firm.
The ‘invest and co-opt’ strategy fundamentally hinges on trust as the holy grail, which most traditional financial service companies cling to as core to their brand equity, even after they’ve tested the patience of their customers and the market so often. They implicitly reason that the Fintechs will struggle to convey trust as they lack security, privacy controls, track record, etc. But as Fintech comms executive Paul Crayston of Marketinvoice.com put it in a September 2015 blog post, “Trust isn’t really a proactive message that will win new customers. It’s a box to be ticked so you don’t lose customers.” Once a customer has a positive experience with a Fintech, he is likely to be open to trying, and eventually trusting, others. This is especially true with Fintechs that don’t require you to commit much money or share personal data (e.g., peer-to-peer currency exchange).
‘Invest and co-opt’ also rests on the banks and insurance companies’ plan to add the Fintech’s products and services into their offering suites, because customers don’t want the inconvenience of multiple providers. This is true for some, but there are indications of growing customer willingness to divide holdings amongst specialist providers, and there are many Fintechs who will aggregate this fragmentation back together again.
But this focus on augmenting the products/services in the account might be at the heart of what many of the traditional financial service companies seem to be missing – the role that relationships and customer experience play in making the brand strong and desirable. In the long run, it only matters that the firm is at the centre of the customer relationship if the customer actually wants to be there, vs feeling trapped there. Setting aside that many Fintechs are marketing themselves as “fun”, the traditional firms have not done much to help their reputations for looking for reasons to say ‘no’, making things unnecessarily complicated, and treating customers as numbers rather than people. There are many big initiatives around improving customer experience (e.g., NatWest and Barclays in mobile banking), and some acknowledged standouts like First Direct, which boasts an always-on proposition, but there’s not enough that is truly meaningful and indicative of genuine behavioural change. The biggest brand play for traditional firms to maintain relevance vs Fintechs may be much simpler than they realise: Consistently show the customer that they matter by promising and delivering experiences that matter to them.