A recent report published by McKinsey predicts that the banking sector, as yet largely unshaken by the transformations technology has effected in the economy, will face stiff competition from financial technology entrepreneurship. Established banks have the advantage of ubiquity, prestige, and perceived stability and trustworthiness, and customers rarely switch from one bank to another.
However, emerging fintech companies offer consumers the kind of convenience and flexibility that tech startups in other sectors have trained them to expect. The McKinsey researchers outlined the deciding factors in these companies’ success or failure to poach customers from big banks.
- Acquiring customers
Established banks already have customer bases, which fintech startups need to acquire customers–an endeavor that is rarely cost-effective. Scaling up will mean finding a way to increase margins while lowering the cost of customer acquisition. On the flip side, fintech businesses can take advantage of existing financial infrastructures by partnering with big banks to provide services the banks cannot (such as software or digital wallet services).
- Lower costs of doing business
Fintech businesses have drastically lower costs than banks with thousands of physical locations. They can then pass savings of time and money on to customers.
- Data analytics
Data analytics can help fintech businesses offer new services, such as computing credit scores for people with little or no credit history or quickly acquiring and and responding to customer feedback.
- Targeting specific segments
Fintech companies’ flexibility and low cost will appeal to young people, small business owners, and underbanked people, who rarely find their needs met by big banks.
- Risk and regulation
Fintech businesses are subject to less scrutiny from regulators than established banks are, but only until they scale up and attract more attention. To ensure success, startups should observe stringent standards on anti-money-laundering measures, credit-related disparate impact, cybersecurity and other ethics issues from day one: financial services are more dependent on customer trust than any other kind of business.
According to the report, fintech startups are poised to chip away at the 60% of the global banking sector’s profits that come from origination and sales. Big banks will either lose their hold on the market or adopt the practices of their upstart competitors.
Read the full report here.
Contributed by Emily Lever.