5 lessons banks must learn from fintech companies

The value of the global financial technology (fintech) market was USD 112.5 billion last year. The same market is projected to grow threefold to reach USD 332.5 billion over the next six years. This growth is sending a clear signal to the banking sector: a new aggressive player has joined them at the poker table and, if they do not act, it will take their chips.

There are more differences than similarities between the operations of banks and fintech companies. However, while fintech is diligently learning from banks how to ensure customer confidence, as well as how to increase the security and reliability of their services, the banks have been looking at fintechs – and some are still watching – from a lofty position above.

The situation is clearly changing, and it is a big mistake to take a cavalier view of one’s more nimble and advanced competitors. The rapid growth of the fintech sector and of individual companies only confirms this.

So what style of game are the fintech companies playing? And what should the banks learn from it?

Courage pays off

Since the 2008 financial crisis, banks have become rather cautious in their lending – and sometimes overly cautious. Some fintech businesses have benefited from this approach. The global COVID-19 pandemic has also highlighted the differences between the fintech and bank approaches to small and medium-sized business financing.

The more conservative big banks were ready to open their arms and wallets up to large businesses during the pandemic, but left the smaller businesses to their fate. Ironically though, in times of economic difficulties, it is the SMEs that need financial support the most.

As the World Economic Forum has observed, the growth of the fintech sector during the pandemic was strongly influenced by the fact that these companies have been able to meet the needs of disadvantaged groups such as women, lower income households and SMEs.

In a world where inflation is soaring, especially in Europe, there is currently much talk of an impending recession. We may soon find out whether the banking sector has learnt the lessons of COVID-19, either by turning its back on individual people and small entrepreneurs, or by allowing its fintech competitors to continue growing.

Focus on customers and their needs

It would be hard to find a fintech company that started without conducting market research and assessing its customer needs. After all, these companies are all aiming to change the way financial institutions or their instruments operate.

In many cases, the solution itself is not revolutionary. Fintech companies offer the same money transfer, payment, loan, leasing and other services that are already offered by banks, but they do it faster, cheaper and more conveniently. Simply put, their aim is to understand the customer needs, the problems they are facing and to respond to these issues. This is exactly what the banks should focus on, if they want to compete on an equal footing with fintech companies.

Yes, fintech companies usually do not have bricks-and-mortar centers where people can come to attend consultations or perform certain operations. However, they provide a 24/7 service and their services are available on different devices – and for many people, this is enough. Moreover, the younger generation, who have grown up with these technologies, generally need only this much. They find visiting bank branches and filling in forms to be an incomprehensible waste of time.

More flexibility

As far as the fintech companies are concerned, flexibility is a broad concept that covers both their attitude towards customers and the services that are offered, as well as their approach to service management and accessibility. In other words, it is not enough to offer good conditions, which some banks are now trying to do; instead, everything must work as the customers expect. Moreover, services must be provided in a way so that the customers do not have to think about it; for most of them, finance is a complicated and boring subject that they do not want to spend too much time on.

Customers also expect flexibility from banks: a study by the international service group Ernst & Young (EY) showed that 27% of respondents are demanding such flexibility from their financial service providers. The EY experts also noted that after the pandemic, people want to know that a solid foundation is under their feet – one in four people are planning to invest more to be better prepared for the future. Therefore, banks have an important role to play in offering flexible savings, investments, insurance and similar products.

Attractive pricing

According to a recent study by the venture capital firm Blumberg Capital, price is one of the key factors in a person’s choice of fintech solutions, even more so than safety and ease of use. In fact, more than half of the respondents (57%) were willing to disclose more personal information to their financial services provider in the name of affordability.

The very nature of fintech companies allows them to offer their services cheaper: they have fewer employees, they do not need to support outdated systems or customer service units, and they can focus on one or several key areas, which allows them to avoid distractions and accurately manage their finances. However, banks can also save on their expenses. For example, the aforementioned Blumberg Capital study shows that 67% of people do not feel the need to go to a financial institution’s physical office, while a year ago this figure was 46%.

On the other hand, the impressive bank profit indicators signal that sometimes their pricing is influenced not by the recoverability of the services provided, but simply by greed.

People care about transparency

The main reason why people trust banks is because their activities are strictly regulated. Meanwhile, the less regulated fintech companies need to earn people’s trust. This is achieved in a number of ways, one of which is transparency.

Most fintech solutions are built using open APIs, third parties and a modular structure. The websites or applications of these companies contain all the essential information: how and what data is collected, what the same data is used for, the service fees, and even the company’s financial results. Incidentally, the problem with banks is often not the fact that information is concealed, but that it is difficult to find or simply understand.

The fintech sector is still relatively young, but it has already shown that financial services can be affordable, clear and simple. Whether the banks learn these lessons and keep abreast of the latest technologies will only become evident over time.

Ekmel Cilingir, Chairman of the Supervisory Board of European Merchant Bank

Originally published at Finextra

Ekmel Çilingir | Chairman of the Supervisory Board of European Merchant Bank UAB