FinTech startups: a threat to the banking establishment?
In the last five years startups have been founded all around the world with the objective of offering financial products and services through internet selling channels. There is growing interest in these FinTech startups. But they still have to prove that their products and services will succeed in gaining acceptance in the long term.
There have been some high company valuations, major financing rounds and takeovers(1) in this area in recent times. In the last three years, global investment in FinTech companies rose four times more quickly than the entire area of venture capital. At almost $3 billion, global investments in FinTech companies have trebled since 2008 and this trend is set to continue such that, according to a recent study(2), by 2018 global investments in this field will have risen to $8 billion.
New York and London have become the most important hot spots in this field, although more and more new startups are also cropping up over here in Germany. One study shows that there are currently more than 100 FinTech startups in German-speaking countries alone(3). It looks like an interesting trend is gaining momentum here.
Foto: May 2014 – Bootcamp for FinTech-Startups in Cairo. By Startup MENA as CC at Flickr
Emphasising the right products for FinTech startups
When it comes to the products and services on offer, there are two main areas. One is account aggregation: companies (aggregators) pull together information and banking details for customers so they have a better overview of their personal finances. The other is optimisation: the service providers (optimisers) focus on a specific part of the financial services value chain and either come up with a completely new service, take an existing service and enhance the customer experience, make pricing models more transparent, or make services easier to understand – or all of these things.
The advantages enjoyed by FinTech startups
One clear advantage startups have is that they are not burdened by the legacy of IT infrastructures that have sometimes spread out over decades. They don’t have to waste time grappling with old or expensive core banking systems. They can just get on with quickly developing, testing and optimising new ones. As a result, they have a major advantage when it comes to processes. They are significantly simpler, easier to use and have a stronger focus on the customer than is possible with traditional banking systems.
As niche providers, these startups can also focus more clearly on optimising their performance than the banks (which are typically broader based) and their more modern, fully-automated processes are faster than any financial advisor.
The disadvantages not enjoyed by FinTech startups
In banking – an area which is also overseen by the authorities and thus subject to certain regulations – managing business is not easy and it’s even more difficult to change it. Most FinTech startups simply don’t have the right experience in financial services and as they start to gauge the market, a significant number of new businesses realise that they have a great product, but it will be subject to regulation – to exploit the product commercially, they will need a banking licence.
Some of the smaller banks have developed their own business models to deal with this and make their licence available to FinTech startups. It remains to be seen if this will end up a win-win situation.
One particularly important factor in banking is trust – especially when dealing with end customers. It can take a long time to win trust. So FinTech startups will have to prove that they have what it takes to build up a significant client base and make sufficient revenues from this to offer investors sustained and attractive returns. It’s a long haul, especially in B2C markets and it can require a lot of capital. In B2B, success can be savoured more quickly. It is here that FinTech startups can establish a presence in territory already occupied by digital natives. As a result, they are sometimes not even perceived as a bank.
- Der Bank-Blog: Was ist wertvoller: Finanzdienstleistung oder Social Media?
- Der Bank-Blog: Das Wachstum der FinTech Industrie
- Fintechforum: First study covering 100 FinTech Startups in Germany, Austria and Switzerland
About the author
Dr Hansjörg Leichsenring is an expert in banking, innovation, social media, change management, customer service and sales. He currently works as a management consultant and interim manager for financial institutions. In his German Bank Blog, Leichsenring reports on current trends and fundamental developments in the banking industry. He is also a popular speaker and moderator inside and outside Germany.