Haseeb AwanContributor
Haseeb Awan is a fintech entrepreneur focused on financial inclusion and money transfers.
The financial services industry is a cutthroat market with razor-thin margins, making it one of the toughest industries in which to generate profit. Yet, for fintech startups, it is one of the least chartered, most lucrative sectors.
Accenture recently reported thatfintech investments grew201 percent in 2014compared to the previous year. As a comparison, overall venture capital investments grewonly 63 percent in the same period.
There is little doubt that today’s financial systems are inherently complex, outdated and inefficient. The potential to innovate within this sector has never been higher. Because of wide-scale technology adoption, mobility and digital money, banking and financial institutions are facing imminent threat from fintech startups for products such as loans, money transfers and stock trading.
Indeed, customers today have more options with third-party financial service providers when it comes to choosing products. However,running a profitable fintech startup is very challenging.
With higher cost of customer acquisition, mostfintech startups are surviving on venture capital funding. Because they are new, Lifetime Value (LTV) is not yet realized. It would be verydifficult for a financial institution to survive on a single product, so they must diversify their portfolio of services to maximize LTV.
No one can unequivocally predict the future. However, here three ways to stay current in the financial services industry.
Existing Banks Must Innovate
Banks are not as slow as they are perceived to be. In fact, they are very smart at focusing on revenue-generating sectors and ignoring less-profitable ones, such as money transfers, small loans, etc. While startups in the space are claiming to take over the money-transfer business from banks, this area is purposely ignored by the banks.
As an example, Western Union, a money-transfer company that controls approximately 18 percent of the money-transfer market, hadrevenues of $5.6 billion last year, while JP Morgan earned $102.1 billion.
Lending, on the other hand, is considered a profitable service, but bank shares within this sector are decreasing. As per a Goldman Sachs estimate, 20 percent of money lending will move to alternative finance companies, costing the banks $12 billion in lost revenue (this is7 percent of the total profits for the banking sector).
Banking and financial institutions are facing imminent threat from fintech startups.
Banks have the resources to acquire the best talent, infrastructure and whatever it takes to get the job done. However, the scale of business reduces chances of upward mobility. Fortunately the banking sectorhas an extremely low churn rate when it comes to core products — deposits and lending.
As per a Consumer Intelligence survey report,approximately 3percent of people change their banks in any given year. Other findings indicate that 57 percent ofpeople have been with their banks for the last 10 years, and 37 percentare trusting their banks even after 20 years.
Banks have the leverage of a huge customer base, experience, licenses and deep pockets. They will try to stay relevant, but if they fail to innovate faster, they could be looking to acquire winners in the niche product markets. In this case, financial companies retain the monopoly.
The Emergence Of Fintech Banks
The biggest challenge for any company is to acquire customers. High acquisition cost can kill any venture. However, once you have acquired a satisfied customer, you can always cross-sell other financial products to maximize ROI. For instance,a lending platform can sell mortgages. Once they are selling mortgages, they can sell insurance and ancillary services, and so on.
Banks initially startedwith deposits and lending, diversifying their product offerings later on. Most startups are currently focused on a singular niche product to takeincumbent market share away from a profitable line of business. Because of the technology-centric nature, they are better at analyzing data and offering better products and a better customer experience.
The key here isto expand horizontally by being equally good at it.
If you are already using a money-transfer company, why not store money with them, as well? Or, if you are a lending platform, why not take customer deposits to strengthen the deposit base? Rather than going through resource-intensive banking licenses, there are many financial institutions open to giving access to their licenses.This will not just be limited to fintech startups, but also socialgiants like Facebook, WeChat, etc. that are eager to enter the financial space.
In this case, a technology startup can be the bank of future.
3.0 Brokerage Banks
There is no secret sauce to running a financial institution, but the bottom line is always the same: Keep your operations as efficient as possible.
However, it is almost impossible to be good at every product facet. A lending platform might not be able to beat their competition in the money-transfer space, and vice versa. Similarly, the lending company may struggle when it has to issue insurance.
If banks are unable to innovate faster or startups are struggling with distribution, this creates an opportunity for a marketing company to consolidate all the services under their brand name.
There is little doubt that today’s financial systems are inherently complex, outdated and inefficient.
Rather than developing any expertise, they just take the role of an intermediary and route the transactions through the best possible partner. For example,they maydirect a money transfer of $150 to Pakistan via one of their partners, whilst they might use another provider for mortgages. It is not an uncommon practice in other industries. However, such an amalgamated model is rarely found in the financial space if you are just a marketing company.
It would not be out of place to say that by 2020 you might be a marketing brand, showcasing and selling repurposed/repackaged products to the consumers — but at the back end, you are neither a technology company nor a bank.
There might not be enough space for multiple players to exist without venture capital in this cutthroat industry. It willbeinterestingto watchwho wants to be the bank of 2020.
But be it a financial, technology or marketing company, the customer will always win.
