Written by Peter-Jan Roose
Do you ever wonder how industries will look like in the coming ten years? Has COVID-19 impacted our way of doing business that digital acceleration is ongoing & imminent? What are traditional players doing to fill in their client needs? In this article, you will find an answer to these questions, but to understand the present situation, we have to go back in time.
Let’s start from the beginning, shall we?
Historically, industries and sectors have been well separated through various forms of regulation, business requirements, know-how, and capital, allowing traditional players to continue their journey at their own pace as well as gradually complexify any market entry.
The risk of complexifying your industry by various mechanics, such as regulation or your product value propositions, will cost you the willingness and love of your end-consumer to continue using your services. If a consumer does not understand the content of your product nor has transparent access to this information, he will start looking elsewhere.
Diving deeper into the Financial Services shows us how this market was:
1. Challenged by FinTechs;
2. Distorted as the traditional lines were broken;
3. Evolved in several different sub-segments, creating nascent markets.
When talking about Financial Services, you may consider services such as:
Retail banking: e.g. daily banking, insurances
Investment banking
Commercial banking
Corporate & Institutional banking
Before we talk about FinTechs, we should define the term first. FinTech is “new tech that seeks to improve and automate the delivery and use of financial services. At its core, it helps companies, business owners, and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones” (Investopedia, 2020).
1. Challenged by FinTechs
Traditional banks used to provide their clients with a one-stop shop for all their banking needs, leading them to create a one-size-fits-all proposition that was translated in their communication and their progressively digital way of working. Imagine: you are opening up an account for your young daughter or son, and after the account has been opened, he or she gets a welcome box including information on car insurance, retirement plans, investment plans. This is not the kind of image that will strike your child as ‘WOW – interesting, tell me more.’ However, due to the lack of alternatives, you remain loyal to your bank.
This got some bright minds thinking: ‘Hey, we can do this better, so let’s try.’ And that’s how initial FinTechs started challenging one of the services traditional banks were offering. This ranged from access to capital (e.g. lending products) and daily banking products (e.g. digital cards and banking offers) to investment banking (access to the stock exchange).
Naturally, these developments are known for their ups and downs which is logical as this had never happened before. But over the years, an enormous amount of companies, sub-segments, M&As, capital funding had been moving around in this FinTech landscape, which put the traditional banks on notice: WE NEED TO DO BETTER!
Source: WhiteSight
2. Distorting the traditional industry barriers
As FinTechs were not the only ones on the lookout for creating new, frictionless, easy-access and digital products, other non-traditional players were also looking into expanding their product portfolio.
These companies that were offering their core activities (e.g. beverages, meat supply) to their B2B customers were being triggered by multiple factors:
FinTechs eased the path for entry in the financial services industry
Know Your Customer (KYC) of your client was ~85% done through your core activities
Increasing demand of clients for support
This triggered large companies like AB Inbev's ZTech to set up their own ‘innovation organization’ that researches key markets to understand the current supply of services, the remaining needs from customers and bottlenecks and barriers all stakeholders are facing.
These opportunities were also triggers to design new business models that allowed traditional companies to gradually grow their alternative revenues and pick out the winning bets of their services.
To provide some anonymized examples:
A South-American meat packing organization set up a banking offer that provides commercial credit cards to their customers for payments and small credit lines.
A Global player in the beverages industry created a ‘marketplace’ to connect institutional & non-institutional lenders to their clients to provide easy access to capital.
As you can see, the traditional financial services industry is no longer closed off by the traditional players. Through various vehicles (e.g. Banking-as-a-Service), any company can access this industry by recognizing its strengths and weaknesses. The latter can be complemented by specialized players in the market to build a ‘stack’ that is worthy of competing with existing offers.
3. Evolution of the traditional industry to sub-segments & nascent markets
Within the traditional financial services industry, earlier divided into four different service offerings, several evolutions have taken place. How has this happened? Thanks to FinTechs focusing on specific challenges, products, and services, the need for traditional players to accelerate innovation is necessary for their survival. As FinTechs are focusing on one or several services, a sub-set of nascent markets and ecosystems arise that are gradually taking over the traditional industry. From focusing on specific segments (like financial inclusiveness, youth, the underbanked, investment, SME) to specializing in a specific part of the tech build-up, FinTechs have exponentially grown throughout the last decade.
Some examples:
Open Banking
Middleware providers
Youth banks
Payroll FinTech
Buy-Now-Pay-Later (‘BNPL’)
Banking-as-a-Service (‘BaaS’)
(Retail) Neobanks
PropTech
AcceptanceTech
Digital KYC
With each of these nascent markets becoming valued segments in the financial services ecosystem and the need to provide the end-consumer the best journey possible, we haven’t seen the end of the tunnel as this remains a never-ending innovation cycle.
Source: WhiteSight
Cash is king:
As earlier mentioned, M&A is a key element in the growing FinTech industry. This cash comes from several forms of capital:
Traditional banks pursuing inorganic growth
Private equity funding
Initial public offerings (IPOs)
Looking at some of the most renowned players in the industry and their current valuations, you would not consider them a small scale-up firm looking to enter the market, as some of these companies are valued above traditional players.
Source: WhiteSight
We have touched quite some points in this article, so let’s do a recap:
Key learnings
One-size-fits-all has become absolutely obsolete
Re-think your current business model & value proposition
If you are not driving at the same speed as the FinTechs, you will miss the train
Traditional industry barriers have faded, and new interconnected ecosystems are the standard
Cash is king: Private Equities know that FinTechs can do serious positive damage to the traditional markets and are not afraid to bet on it
M&A of FinTechs by traditional banks are more likely to fail given the difference in culture, speed & willingness to change
Do you want to learn more about this subject? Contact our financial expert Nicolas Solignac to see how BrightWolves can support you to catch the FinTech train.