FinTechs must maintain their hard earned adoption rate
In the last five years, FinTech startups like Monzo, Starling, N26 and Atom Bank have revolutionised the UK’s banking sector. In fact, most challenger banks are now established financial companies – at least in the eyes of millennials and the more technically literate, anyway.
While many people still prefer to bank with a major name, a growing number are willing to give younger alternatives a try. But how popular are challenger banks, really? And, more importantly, what do they need to do to stay relevant in the volatile financial sector?
Slow but steady adoption
A survey by Finder published earlier this year found that nine per cent of people living in the UK had opened an account with a digital only bank. As expected, the research suggested that digital accounts were more popular with younger and presumably more tech savvy respondents than with older generations.
The survey also found that location matters – London is a thriving FinTech hub, so it comes as no surprise that the highest concentration of users live in the UK’s capital. Over the next five years, more than a quarter of respondents living in London expect to open a digital account. At the moment, London and New York stand out as prime locations for FinTech development, but there are significant opportunities in emerging markets where mobile saturation is almost universal.
The challenges of being a challenger
What needs to happen for digital only, challenger banks to continue to attract customers? First of all, they need to appeal to more people. The obvious target is middle aged to elderly customers, but there’s a gender question too. According to Finder’s survey, men are almost twice as likely to consider using a digital only bank than women. Whatever the reasons for this, challenger banks need to become more inclusive. They may consider building products that are specifically aimed at certain demographics, or launching products for developing markets.
Perhaps the biggest issue, and one that spans the entire financial sector, is trust. It’s hard enough for customers to trust legacy banks, let alone those that have only existed for a few years and are still building their reputations as credible businesses.
Customer centricity is key to answering these questions. As FinTechs scale, they will be able to gather more customer data and put it to good use in product development. Data sharing through open banking initiatives and accelerator programmes will help, but challengers shouldn’t necessarily rely on bigger organisations to help them out.
A license to bill
One of the biggest barriers to entry for disruptive financial companies has been obtaining a banking licence. It certainly isn’t easy – nor should it be. Prospective banks need to prove, that they are fit to operate as a fully licensed bank. Even once an applicant is successful, they must wait out an interim period and then a further six to eight months to reach authorisation with restrictions (AWR). At best, it takes around a year to grant a full licence. For fast moving startups, the waiting period is especially unwelcome.
One way around this dilemma is to operate under the licence of another bank, either as partners or subsidiaries. One subcategory of challenger banks, non banks, don’t use traditional licences at all. UK FinTech Monese, for example, holds an e-money licence instead. This requires banks to carry out a slightly less arduous application process at the expense of being able to offer certain services. The next wave of challengers are likely to find even more ways to avoid applying for a full licence, which will necessitate regulatory change.
Checking in on tech
A Bain & Company survey of over 133,000 US and UK banking customers revealed that respondents trusted Amazon and PayPal as much as their banking provider. In banking, trust is the turnkey. Gaining and retaining customers will be much harder if (and when) a tech giant steps into the space.
The movement of technology companies into banking goes beyond speculation. In 2014, Apple released Apple Pay to function as a digital wallet for its customers, replacing card transactions. Google already provides financial services for the likes of HSBC, Scotiabank and PayPal, and Microsoft has developed its own Banking Accelerator software.
The journey is far from over for the innovative FinTech companies that have changed banking for good. Many have graduated from startup school and become fully fledged scale ups, working with financial incumbents to revamp finance.
What they need to do now is focus on a range of customer profiles to proactively encourage more customer diversity using advanced data analysis techniques. They should also prepare to compete with financial services developed in the data caves of leading technology companies from outside the sector, such as the recent partnership between Apple and Goldman Sachs.
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