The FinTech sector – often hyped as the answer to banks’ digitisation woes – demonstrated resilience during the COVID-19 pandemic, with leading FinTechs recording double-digit growth despite sector-wide operational and financial challenges.
However, scratching at the surface of this positive picture demonstrates all is far from rosy in FinTech.
Data from CapGemini suggests just over half (51 percent) of FinTechs expect to deplete their capital reserves this year as the COVID-19 pandemic hits, while the volume of mergers and acquisitions involving FinTech companies grew by 11 percent in the last quarter of 2020, suggesting many owners and investors may be looking to cash out while things look relatively positive.
Digital messiahs – or cash drains?
In response to FinTechs’ growing popularity among consumers and their approaching profitability, traditional banks have been creating digital-only entities designed to appeal to specific customer segments, especially younger clients.
According to CapGemini, one in four global consumers are on the lookout for faster delivery and personalised services, and say they would try banking products from new-age players.
However, while consumers increasingly accept FinTechs, they continue to trust traditional banks, with 68 percent saying they would only try a digital offering operated by their primary bank.
Well liked, less well-supported
While traditional banks might talk a good game when it comes to digital transformation, the views of those in the FinTech sector regarding partnerships with traditional banks are less positive.
Complaints include banks’ reliance on legacy mindsets and old business models that hinder the transition to digital, a lack of long-term support, unwillingness to support transition of the bank’s customer base to digital services, and weak digital-only propositions from banks.
In brief, digital transformation appears to have reached a “tipping-point”, where traditional banks continue to adopt a piecemeal approach to digitisation while FinTechs risk losing heart, running out of money and/or not finding receptive and willing partners among traditional banks.
Meanwhile, decades of operational patches and intertwined legacy technologies continue to present significant transformation challenges for Europe’s old-guard banks.
Profitability remains an issue
If circumstances are challenging for the old guard, then FinTechs face their own issues, especially when it comes to profitability.
Although FinTechs may be acquiring customers, their capacity to encourage those customers to use their products, achieve widespread circulation of their products and make money from those products remains a stumbling-block.
For instance, UK challenger bank Monzo is able to acquire new customers at a cost of £46 ($65) per user – far lower than traditional banks at $250 per user.
However, its revenue per user is only around £17 ($24), compared with high street banks making around $800-900 (£575-650) per customer.
Clearly, such low revenues per user are unsustainable and many FinTechs must move quickly to grow their average revenue per user to survive. While late-stage investments are rising, the onus is now on FinTechs to prove their business models will deliver.
PCM SAYS:
For some time, retail banking has been an increasingly unattractive proposition, with banks either merging themselves out of existence or reducing their branch numbers and exiting unprofitable business lines. Many consulting firms tell banks partnering with a FinTech is the cheaper, faster and easier route to digitisation: in practice, however, bank/FinTech partnerships are fraught with cultural and operational challenges.
As we emerge from the pandemic, it will be interesting to see which side wins. Although thousands of European consumers are opening digital bank accounts with so-called “neobanks” every day, early reports relating to customer satisfaction – and consumer usage of these accounts – are mixed at best.
If a traditional bank can come up with a convincing, digital-first model and successfully transition its customers to this model, that is likely to be the winning strategy. Meanwhile, many FinTechs appear to have a long road to travel before they can claim to have delivered a compelling, sustainable business model that delivers profitable growth.
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