The financial services industry is in the midst of a digital revolution led by fintech startups. These nimble, customer-centric companies are rapidly establishing a new status quo as they hone in on the consumer and business pain points the large incumbents have failed to address.
This week, for our exclusive “Let’s talk…” feature looking at competition, we asked more than a dozen industry experts – including the CEOs of FinTech Australia, Prospa, MoneyMe, zipMoney and Tyro – whether the big financial institutions can survive without fintech.
The consensus was “well, not really” and that to maintain their market relevance and stay competitive, the large incumbents must think like – and collaborate with – fintech startups. Of course, many noted that fintech startups also have much to gain from collaborating with the big institutions, from scale through to access to hundreds of years of financial market experience. As one commentator put it, both sides “need each other” to thrive.
Read on for further insights from this week’s line-up of “Let’s Talk…” commentators:
“Can the big financial institutions survive without FinTech?”
Danielle Szetho, CEO, FinTech Australia: “No, the large banks cannot survive without fintech. NAB admitted as much in its profit announcement in early November, when its CEO flagged a digital transformation program, stating: ‘we are trying to think like a fintech ourselves’.
“As an incumbent, it can be hard to think outside of your own product lines and technology stack. Truly unique ideas – the ones that create giant leaps rather than step-change innovations – often come from starting with a blank canvas where the consumer need is at the centre. That’s why Australian consumers are increasingly looking to fintech solutions and, therefore, the banks will need to follow suit.
“The EY FinTech Adoption Index released in June this year found that 37% of Australia’s digitally-active population are now fintech users, compared to 13% in 2015. Over the same period, the number of Australians who said they would prefer to use a traditional financial services provider dropped from 23% to 10%. The real question is whether banks try to develop their own in-house fintech solutions, or instead seek to collaborate with existing fintech startups.
“Moreover, if banks seek to simply develop their own solutions, then the Australian financial services industry will remain extremely concentrated, less competitive and easier to disrupt by overseas players. As a result, we advocate strongly on behalf of collaboration between banks and fintechs.
Clayton Howes, CEO & Co-founder, MoneyMe: “My quick answer would be that we need each other. Fintechs need banks to continue providing the foundation while banks need fintechs such as MoneyMe to establish new forms of user journeys that satisfy changing finance consumption patterns. Australian fintechs and banks need to exist in partnership to alleviate the pressure that will be applied to us by global players like Apple Pay, Alibaba, PayPal, Facebook so that we can continue to own our own market.”
Larry Diamond, co-founder & CEO, zipMoney: “Large financial institutions might be able to survive without FinTech but they’ll really struggle. Traditional financial institutions are finding it extremely difficult to reach the consumer and this is only going to get harder. While some of the big guys’ in-house FinTech innovation is excellent, it’s not enough.
“Technology and culture is moving toward greater openness, connectedness and transparency and you only tackle that by being open and experimenting with a vast diversity of new ideas and approaches. Fintech is re-imagining the world of money for everyone.
In our space, we’ve turned payments into a powerful customer engagement tool in part because we always stay close to our consumers and our merchants, shaping the offering to fit their needs. The future will be partnering – similar to what we recently did with Westpac –since there’s plenty to learn on both sides: Fintechs from the hundreds of years of financial market experience banks possess; banks from the dynamism and technology they lack.”
Beau Bertoli, Joint CEO, Prospa: “They can survive but not thrive in the long term. The 2017 World Economic Forum Report ‘The Future of Financial Services’, made it very clear fintechs have changed consumers’ expectations around customer experience and have played a major role in defining the pace of innovation.
“Traditional financial institutions have recognised they need to change in order to remain competitive and are developing their own technology solutions, or partnering with established innovators like Prospa.
“And as fintechs lead the revolution, the big winners will be customers – including small business owners – who can now access and manage their finances quickly and easily, from their phones, 24/7. They’re already voting with their feet. We’ve just passed $500m in loans delivered over 5 years and demand is not slowing down.”
Rob Ferguson, Executive Director & acting CEO, Tyro: “Fintechs are creating a more competitive market and forcing change to the economy in which all financial institutions operate, from startups to the major banks. We are now starting to see this change in the finance landscape with the bigger players slowly losing dominance. To stay relevant in this changing economy, big financial institutions will need to redesign their outdated business models and innovate with technology.
“Fintechs are providing improved technology and operations to better deliver financial services which is disrupting the traditional financial services industry. This is one of the biggest risks facing big financial institutions – to keep up with the change of pace, they need to put significant investment into technology to meet the risks of new entrants working with agile methodologies and service models reflecting customer expectations.
“As a fintech that uses disruptive technology, Tyro supports fintech newcomers through its very own FinTechHub.”
Andrew Corbett-Jones, Head, Tyro FinTechHub: “I’m often asked what the next hotspot in Fintech will be. I can’t tell you what it will be but I can 100% tell you why it will be. It’s easy – look for any segment of the market that the banks have ignored, or overcharged, or mistreated. Right there is where the fintechs will swoop in. And there’s a lot of those segments! If the banks wanted to defend their market share in those segments they could, but they tend not to, until it’s too late.
“As much as they may talk about adopting fintech, we know that fintech will radically re-shape the banks and their role in the market. The web fundamentally changed newspapers. Streaming media fundamentally changed TV and music publishing. Fintech is doing the same to banking. As Bill Gates famously said: Banking is necessary, banks are not.”
Shahirah Gardner, co-founder, Finch: “Probably not. At the end of the day, financial institutions aren’t technology companies. The pace of innovation is faster than their internal processes and systems can adapt to.
“More importantly, the culture and core competencies of existing employees are such where the risk of failure is high and not promoted. Fintechs are disruptive precisely because we fail fast, and can deliver innovative, experience-driven solutions in a fraction of the time and resources it normally takes.
“Finally, with “big tech” posing the greatest threat to banking, financial institutions should be collaborating with fintechs to accelerate innovation instead of partnering with the companies that will become their direct competition.”
Joel Robbie, co-founder & CEO, AI-powered financial advice platform Nod: “The short answer is ‘yes’… but in a much smaller form. Fintech will cause the fragmentation of offerings because the technology is built to be interconnected. All of a sudden, you don’t need a big financial institution to be efficient in managing your financial affairs, technology is helping you to do that.”
“If I’m a big bank I’d be thinking about becoming a platform ecosystem. The biggest companies in the world have this structure – Apple, Google, Facebook etc are all platform businesses that allow other companies to integrate with them seamlessly, making them stickier as a result. This is the way for big financial institutions to embrace fintech and ensure their own survival.”
Pat Garrett, CEO, robo-advisor Six Park: “Big financial institutions might survive but they’re unlikely to keep thriving without embracing the value propositions of FinTech – and they know it. In November, NAB committed $1.5 billion to tech innovation and jobs, while international banks such as JP Morgan and HSBC are acquiring or partnering with FinTechs because they understand both the benefits of FinTech solutions, and the threat that these solutions pose to the status quo. If you can’t beat ’em, join ’em.”
“The recent announcement of a Banking Royal Commission (BRC) in Australia further highlights the lack of transparency, trust and accessibility that’s plagued the traditional banking sector. FinTech entities use technology and innovation to address these problems, and the BRC is partly a result of the public demanding that clients’ interests come first.”
“Fintechs are nimble – with product development, they can pivot faster than large incumbents and, as a result, they’re at the forefront of innovation in banking and investment management. The big banks will undoubtedly be at a significant disadvantage if they don’t embrace technology and transparency and make sure customers’ needs are at the centre of product and service offerings.”
Hugh Morrow, CEO & co-founder, digital advice provider SuperEd: “Australia’s big financial institutions, particularly super funds, are struggling when it comes to fund member engagement and fees. Getting members engaged can of course create cost pressures for these institutions both to initiate and then to service the higher levels of engagement. This is one reason why they will need to turn to fintech disruptors who can add so much value by facilitating the provision of additional service with little cost impact or by helping migrate traditional costly services to lower cost channels.
“Our focus at SuperEd is on empowering people to make better financial decisions. We empower them by helping them understand who they are, how they want to interact, what their objectives are and by providing them with the knowledge and the tools to be able to make decisions and take the appropriate actions.
“While I don’t believe fintechs will necessarily overtake the traditional funds, and certainly not the large ones, some of them could carve out a significant niche. They are already doing this by appealing to particular values that the traditional funds are not. This could be a generational and technology focus as with Spaceship, an ethical focus such as Cruelty Free Super or the focus on control and empowerment of Mobi and GROW Super.
“All of these funds are appealing to particular goals and values. The traditional funds can also do this not only through the investment options available but also in how this is communicated, particularly in terms of the language and imagery used. Some funds might even consider the creation of products under secondary brands to help with their positioning. Technology is facilitating the rise of these entrants but also can provide the tools for the traditional funds to respond quickly.”
Julius Wei, Co-Founder & Head of Investment Analysis, Chinese wealth advisory firm BMY Group: “The technological disruption in the financial industry has been going on for a while, and there is really no fintech-free financial institution now in the market, particularly so among big institutions. This alone proves our answer that they cannot survive without embracing fintech.
“Fintechs can provide more efficiency for financial institutions across two main aspects.
“Firstly, they improve the front-end user-experience significantly to help the service win more clients and increase the stickiness of those clients. Hence, not using updated technology means losing your clients. Secondly, technology also helps to enhance back-office efficiency with automated processes. The financial sector is one of the most heavily regulated sectors, which has huge transactional/compliance workloads and costs at the back office. Lots of fintechs can provide this with less errors and potentially cheaper costs. Hence, not using fintech also means losing profitability.
“It’s no wonder the big banks are also the biggest buyers and investors in fintech in Australia.”
John Cooper, Managing Director, CHL Home Loans: “Any financial institution in today’s market will find it difficult to remain commercially competitive without embracing some elements of emerging fintech solutions in their back-office processing and customer portals.
“By carefully selecting appropriate, user-friendly software and systems an organisation providing financial products can not only reduce processing costs but can offer those potential savings to the borrower.
“As we know many borrowers currently apply online for finance without the need to speak with a broker or lender. While this suits some people, there are still a large proportion of people who prefer human interaction in their dealings with a financial institution. So, the secret is to keep your technology and products simple and make them easily useable for your customers.”
Sarah Moran, Co-founder & CEO, Girl Geek Academy: “All banks are technology companies now. FinTech is forcing banks to revolutionise their organisations as they are under increasing pressure from up-and-coming digital financial products — which includes offerings from Google and Amazon, alongside smaller, niche offerings that target a specific demographic, like Tyro.
“Banks are making bold moves to own the market and target the generation most resistant to traditional banking methods — millennials. Like many traditional industries banking must engage with FinTech startups rather than lose their market share to smaller, nimble businesses by embedding best of breed technology quickly and respond to current market needs.”
Brett Shanely, Co-founder & CEO, Study Loans: “The digital revolution has completely shaken up the financial services industry. Not long ago, those in the industry discussed whether FinTech start-ups would gain any real traction, now they’re beginning to surpass traditional banks in their IT system offerings and ability to react to rapid changes in consumer expectations.
“Disruptor companies offer innovative solutions to traditional banking through product offerings, technology and processes. Where traditional banks fall short, FinTech innovators have begun cropping up. Student loans are a great example of this. Where the big four might turn a student away due to a lack of assets or income, others take a more flexible and broader view of an individual’s financial situation. In order for the big financial institutions to survive, they need to embrace the disruption that FinTech inevitably brings.”
David Jones, General Manager, Wellington Regional Economic Development Agency (WREDA): “There is still a role for the traditional financial institutions, but the areas of growth all lie in embracing new technologies. In Wellington, we’ve witnessed a thriving community of fintech companies grow in a short period — embracing the potential of reinventing how people manage and invest their finances.
“Historically, financial institutions acted as a trusted third party to handle funds. However, thanks to developments in fintech, the need for this traditional business model is rapidly diminishing. Wellington has helped nurture a supportive home for a range of businesses that are embracing the fintech revolution; including ASX-listed Xero, Wellington’s 2Shakes — using blockchain tech to make transferring money safer or Sharesies, a startup giving everyone access to investment and the chance to have an investment portfolio.
“Three main areas are driving the rapid growth of fintech — identity verification, big data and security. As customers become more aware and more concerned about the safety of online transactions, they are turning to fintech solutions for peace of mind and greater simplicity. Fintech firms will likely never completely replace the areas dominated by traditional finance institutions, but they will continue to challenge the status quo and are likely to grow even faster, because they are building solutions that address customer needs.”
About “Let’s Talk…”
This exciting new, weekly initiative provides entrepreneurs and industry experts with a forum to share rapid-fire views on a range of issues that matter to start-ups and SMEs. Every Wednesday, we pose a themed question to a line-up of knowledgable industry figures, with a view to picking their brains for valuable insights to share with you, our readers.