To avoid being disrupted, financial institutions are not just having to be far more experimental, in some cases they are having to cede control of their customers to fintech companies, according to Ian Pollari, the global co-leader of KPMG’s Fintech practice.
Speaking at the Financial Services and Technology: Financial Inclusion and Stability conference, held at the University of NSW this month, Pollari, noted the “hype and noise” surrounding fintech, adding that “on one hand, there’s nothing terribly new about fintech but on the other hand there’s substantial change and disruption”.
He said that the fintech boom is forcing traditional financial institutions to get “far more experimental” and “embrace innovation” in order to capitalise on opportunities to grow outside of their core business.
As part of this shift in mindset, Pollari said the market incumbents are having to collaborate with fintech companies even though collaboration (including the notion of ceding customer primacy and relationships to a partner) “doesn’t come easily to them”.
Pollari pointed NAB’s recent deal with Xero to enable the bank’s small business customers to execute a payment through the cloud accounting provider’s platform rather than via its internet banking site.
“As banking payments become more embedded in day-to-day life, consumers don’t want to step outside of an experience to undertake financial services activities,” he said.
“NAB has reflected on that and said, ‘well, Xero’s got that point of customer interface, the primacy of the customer relationship and we’re happy to fulfil a particular financial need within Xero’s platform’.”
Pollari suggested an increasing number of financial institutions would have to allow themselves to be “orchestrated” by fintech players in this way in order to expand beyond their core business.
Pollari said while payments and unsecured lending account for two thirds of all fintech activity in Australia due to lower barriers of entry than in other parts of financial services industry, it was “hard to see this being sustainable”.
He said KPMG expects to see some consolidation in the payments and unsecured lending spaces, likening them to ‘winner-takes-all’ markets, where the market leader “usually captures about 60 to 70% of the market share” and benefits from the network effect.
Pollari said this has strategic implications for financial institutions who are thinking about which fintech companies to partner with, invest in or acquire. Specifically, he said many financial institutions won’t have the luxury of being able to partner with a fintech that is trailing in the market while the number one player is partnered with a competing institution.
“It’s important for financial institutions to be thinking about both the defensive and opportunities to grow their business,” he said. “They should be working across the full spectrum of fintech activities, enhancing their own internal capabilities [and] evolving their sourcing practices to effectively work with small tech companies in experimentation mode.