FinTech startups are attempting to set up new services that will link up digital technology and financial services in such a way that customers gain extra benefits as a result. There are four main areas they are working in: payments and transactions, personal financial management (PFM), trading and consulting platforms for investments, and new financing arrangements and credit models.
Payments and transactions
Payments is the area that was entered into first and it’s also where the most FinTech startups are to be found. So it’s not surprising that according to a survey of European bank managers(1), 95 per cent of respondents believe that new market entrants are likely or highly likely to threaten revenues.
The best known business model is PayPal which has already stolen significant market share off the banks and is a good example of how the established banks misread market developments. Even before eBay bought the company for €1.5 billion dollars in October 2002, it had been offered to a variety of international banks. They all shooed it away…
In the meantime, there are a variety of providers operating in this area, who are not only the results of new startups but also from established companies from a variety of backgrounds.
Apple attracted particular attention with its new Apple Pay system(2), which has been available in the US since October 2014. Google, Amazon and a variety of different mobile phone companies have also now entered the fray with their own solutions.
These have also been joined by FinTech startups like Cashcloud(3), an electronic wallet on your mobile which not only allows you to make payments but also allows you to collect discount vouchers. You can even transfer person-to-person payments to email, Facebook or Twitter contacts.
Others like iZettle are attempting to occupy the pole position in an individual section of the value chain with innovative services at the point of sale.
Personal financial management (PFM)
PFM originates from the United States where the pioneer in this field, Mint, now claim to have over four million users. In Europe this area has developed hand-in-hind with the level of internet usage and online banking, edging north to south.
The trailblazer in Germany is Comdirect who have been offering PFM to their customers through a ‘Persönlicher Finanzmanager’(4) since early 2014. The service is integrated into online banking. In the meantime they’ve been followed by cooperative banks like DAB. Other launches are expected imminently.
The PFM market is dominated by B2B services, ie, specialised companies who offer banks white-label products which they then offer to their own customers. For example, Comdirect developed their PFM solution in collaboration with the Nordic startup Meniga who are currently the leading European provider in this area.
End-customer products developed by the startups are struggling, partly because customers in this market have more trust in the banks, as was shown by a survey carried out by IBI Research at the University of Regensburg(5).
Trading and consulting platforms for investments
Financial investments have traditionally been a highly profitable area for the banks, albeit also controversial in terms of the customer benefit. Consumer rights organisations have lambasted the banks time and again for inaccurate and sloppy consultation and even the powers that be are attempting to strengthen the position of customers, for example with the introduction of consultation logs (minute-taking) or obligations to declare commission rates.
This is where startups like Vaamo, Geldempfehlung and Moneymeets come in, with web-based portfolio optimisation services for private customers. Their websites have an uncluttered design with everything reduced to the minimum and services that are easy to understand. These services are also less expensive than traditional equivalents and are aimed at making it easier for end customers to achieve their savings and asset targets.
Nevertheless, as in other areas, a service or product can be great but it takes time to attract a critical mass of customers and the traditional banks are not sleeping, as witnessed by recent announcement from Deutsche Bank(6), who want to enter the market in this area with their own innovative services.
New financing arrangements and credit models
Offering credit is one of the original core services of banks – which is where terms like credit institution come from – and their activities are regulated by credit services acts. But this area is also under bombardment from a variety of FinTech startups.
Companies like Smava and Auxmoney are trying to gain a foothold in Germany with so-called peer-to-peer lending, a model whereby the lender and the borrower are brought together without any involvement of the banks.
On top of this, there are specialised providers such as Klarna, Ratepay and Billpay, who offer sales financing, eg, they help finance online retail sales. According to experts, disruptive innovations are particularly likely in this area. However, the marketing costs are still prohibitive and there is a lack of experience in risk management – a plus for the established banks.
Many FinTech startups are hoping their solutions will provide a vehicle to enter the traditional realms of banks and savings banks and if not completely poach their customers at least steal them in certain areas. There are now a variety of interesting offers on the market with benefits that are obvious to the customer. But it will be a number of years before we will know if the startups will succeed in changing customer behaviour in the long term and even become a serious contender for the established providers – or whether they will be bought up by the established banks who will then integrate their ideas into their own portfolio.
- Der Bank-Blog: Die Zukunft des Retail Bankings in Europa
- Der Bank-Blog cashcloud – Wir haben dem Bargeld den Kampf angesagt!
- Der Bank-Blog: Persönliches Finanz Management startet in Deutschland
- IBI: Studie: Personal Finance Management
- IT-Finanzmagazin: Deutsche Bank: Online-Banking mit photoTAN und Fingerabdruck (ab iPhone 5s)
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.