Smart players should be looking for partners, blogs Partner at KPMG Ank van Wylick. But where to start? An introduction to the fintech forest.
Ask any bank, insurance company or pension fund what the greatest challenges in their sector are, and their number one response will be compliance, followed by costs and, somewhere at the bottom, innovation blogs fintech- and innovationexpert Ank van Wylick. And even then, she ads, innovation is mostly seen as product innovation (like an app) instead of process innovation or changing the entire business model.
Short-term thinking is popular, even now that fintech, which stands for all the technological innovation in the financial sector, really is at the threshold of turning the financial world upside down. There are even pessimists who claim that banks will should reduce their headcount by 50 per cent.
Of course, the fintech market (only) realises turnover of 45 billion euros, which is small change, representing two to five per cent of total turnover in the financial markets. However, that small change is growing rapidly and when the penetration level of fintech approaches 10 per cent, we’re reaching a tipping point. At 17.5 per cent, the advent of fintechs is unstoppable. The pattern is the exact same as with previous disruptions in, for example, the newspaper sector or retail. Physical outlets hit rough waters and folded when online sales in certain sectors reached 10 per cent of the business.
Whoever is active in the financial world knows one thing for sure: you’re going to lose some of your profit to fintechs. Imagine the financial world as a forest. At the moment, the forest is still full of hardwood giants; the banks, insurance companies and pension funds. But the fintechs are eating at the roots of these trees; there are already more than twelve thousand.
Some of them are benefiting the giants. These are the so-called enablers, which help corporates to innovate by, for instance, coming up with a clever application for better interaction with clients. Think of the payment solutions of Bankable which, among other things, offer e-wallets and BioCatch that track down fraudsters based on online behaviour. But there are also so-called challengers, parasites that extract nutrients from the soil that were previously exclusively for the giants. Think of Wealthfront, which computerises investments, or insurer ZhongAn, which uses big data for estimating claims and offer smart insurance on that basis.
Are these challengers going to become the banks, insurers or funds of the future? The majority of them not. They are simply to clever to focus on traditional banks. The reason? People don’t need banks, they need banking. The real disruptors in the financial sector therefore will come from an unexpected angle. Imagine, for instance, that a party as Facebook starts facilitating payments to friends. E-commerce giant Amazon already announced it wants to take over fintechs in payments.
To complicate matters even further, a third group is taking root in the soil of the forest: the fintechs, which both help and attack. That includes Kabbage, which has its own money-lending facility, but also does it on behalf of partners, such as banks.
The arrival of the enablers, the challengers and the fintechs which fulfil both roles, ensures that increasingly more service providers swallow part of the value chain and thus nibble away at the cake of the ‘big’ banks, insurers and investors. Whoever still thinks of becoming or even remaining a ‘hardwood giant’ is fooling themselves. Choices are essential: which position in the value chain do I have to defend and what do I have to invest in then?
With product innovation, the established names of now are no longer a given. Process innovations make more sense. A major bank like ING says: ‘We’re no longer bankers, but IT companies.’ Goldman Sachs says that one third of their staff are engineers.
Smart players are looking for partners. Recently, I did a presentation for the Central Bank of Israel. My message: don’t see fintechs as a threat, but seek partnerships. Join up with a fintech, for instance, to get an innovation on the market more rapidly (start-ups are often better at this) or buy a start-up so you can look under the bonnet. I ended the presentation with the final scene from Casablanca, one of the most famous films ever: ‘Louis, this is the start of a beautiful friendship.’ With this attitude, the forest giants should look at the new saplings.
Author: Ank van Wylick, partner at KPMG