You’re digital, but not too digital; you want direct communication but don’t want to be harassed with emails or calls; you don’t like attending bank branches but always want to have the opportunity to talk to your bank consultant. What does the average customer, with a combination of traditional and digital needs, actually want?
Besides traditional financial service providers, many young and digital startups - so-called fintech companies - are trying to answer that question. They offer a large variety of additional services, to fulfill the needs of customers with a certain web affinity: managing bank transfers via text messages, applying for online loans within minutes and a bank account that is exclusively accessible through apps.
Currently, many experts speculate about who will win over customers in the end. For the customers, it is of marginal importance whether financial services are provided by large traditional banks or fintech companies with a 20-person team. However, the kind of service that customers receive is important to them: They want the best product from a trustworthy provider and ideally all their financial services from a single source. Having multiple contractual partners is unsatisfactory.
The result of having several bank accounts and shares portfolios from different banks is a vast amount of paperwork. Besides, finalising these contracts in physical bank branches is also quite time consuming. Passionate customers of fintech companies may save time and paperwork, but they have to use several apps and websites with different interfaces and several different logins that have to be remembered.
One channel for all services
The solution that is currently being developed in the financial industry is a digital platform on which all different products are offered. Customers can pick the products they need by using one single channel - that is convenience and ease. The development of these platforms does not only satisfy customers but also signals the end of a battle between banks and fintech companies.
In the last ten or fifteen years, the relationship between disruptive fintech enterprises and long-established banks has not always been a harmonious one. Soon after the first beta phases were completed, fintech companies confidently announced the end of the traditional financial services industry. ‘Disruption’ was the omnipresent buzzword in panels and on blogs. The banks, however, reacted with the calm of those who have outlived more than one revolution. Internet, apps, online - a trend they thought would soon belong to the past.
Fancy talk of disruption
As soon as it became clear that a large amount of customers did not share that opinion but actually got to like the new digital products, banks started to change their minds.
All of a sudden, field trips to the Silicon Valley were no longer only fashionable but a necessity for executive board members. A digitization strategy had to be part of every corporate report and customers were lured with new and fancy banking apps. Fintech companies were counterattacked by investing in them, copying them or by the creation of digital labs, that sought to produce the same level of innovation and technological progress.
But fintech companies changed their minds as well: Instead of regarding traditional banks as analogue leftovers, they realized that these banks still had millions of customers. In addition, the fintech sphere gained first experiences in what it means to apply for BaFin licenses - and actually keeping them. Disruption made way for cooperation.
This is now the current situation in the industry. Banks and fintech companies work with each other as peers which results in large numbers of cooperations. Large banks implement digital insurance brokers and financial service providers offer their clients to switch bank accounts digitally by using the technologies of the new players. The German blog “Payment and Banking” has counted roughly 70 cooperations between 32 German banks and their digital challengers - and that’s only from April.
The platform solution takes the cooperative approach a step further. Platforms include products and services from banks and fintech companies, even services that directly compete with each other. This will be challenging especially for banks, because they will have to offer third party services even if they are superior to their own. Such platforms can be set up by modern banks with a digital approach but also by large and regulated fintech companies.
Casting a glance at China, a third way emerges - social networks as financial platforms. The messenger service WeChat is currently on its way to becoming China’s market leader for mobile payments. Roughly 697 million people worldwide are using WeChat already and 200 million new users join the service every month. In the meantime, WeChat also has opened up a German branch.
Users of the application can transfer money among themselves and also use the service to pay their bills online. The success of this Chinese social payment method can be explained by the fact that China has previously been an underbanked market before. According to a study that was published by McKinsey in July 2016 (“Disruption and Connection: Cracking the Myths of China Internet Finance innovation”) only one in five Chinese adults has access to financial services. Still, more than thirty percent of the population use financial services on their mobile device. For the majority of underbanked Chinese people, which also includes around 277 million itinerant labourers, digital payments via social networks are the most simple solution to transfer money.
This development is not very likely to be seen in Europe, because many young people already have access to one or more bank accounts. In addition, people still have more trust in banks than in new technologies such as social network payments. Nevertheless, banks should not react to that circumstance with idleness, as the success of fintech companies has already shown.
In the end, the surviving model will be the one that considers the customer's needs and also prioritizes data security. It will be a digital platform with knowledge, agility, passion and a profound security concept. After recent developments, that development is not as unthinkable, nor as distant, as it may seem.
This article has been published first in German by Wirtschaftswoche.