Because of the high expectations, ideas and investments generated, fintech is currently one of the most interesting business sectors. The emergence of fintech startups – which combine a more effective and imaginative use of technology, and modern management of talent – has created a sense of alarm in the financial sector that’s largely unaccustomed to external disruption.
The possibility that the bank industry is disintermediated (as were the news, music, tourism and film industries) sounds like a prophetic mantra at events, specialized blogs and boards of directors, exacerbated by the interest of GAFA ( Google, Amazon, Facebook and Apple) in offering financial services to its users. Although this promise is still far from completion, nobody wants to steer clear of this phenomenon. Fintech investment tripled in 2014 compared to 2013, through spend by the financial industry and tech giants such as Intel and Google, and IPOs such as Lending Club.
While there is already some consensus on how to classify the different fintech companies, in this case we wanted to offer an alternative vision based on its position relative to traditional banking; are fintech startups focused on selling to customers ignored by banks? Do they take advantage of inefficiencies? Do they compete on equal?
With this non-exhaustive overview, we have divided these companies into five different types: Sioux, Guerrilla, Samurai, Double Agents, and Invaders from Outer Space.
Fintech companies’ classification based on their ‘position’ in banking
Sioux – fintech companies that serve customers who are not interesting to banks.
These are positioned in markets that traditional banks ignore, offering a product or service that the customer may not get from a bank, even if he wanted to. The most prominent examples are crowdfunding platforms and P2P lending, where users fund ideas and companies that would barely succeed otherwise.
That it’s a market segment ignored by banks doesn’t mean it’s not profitable for these platforms. In fact, some of the biggest fintech ‘hits’ have occurred in this sector. Kickstarter (which recently became a benefit corporation) has raised $2bn so far to finance creative projects (including Oscar award-winning films) and has fostered one of the most dynamic communities around itself. The Lending Club (private lending platform) IPO was the most successful technology in 2014 in the US, reaching a valuation of $8,500m. Interestingly, the most popular client is the person who wants to consolidate outstanding credit card debt into one loan.
Within this group, we also find startups such as Compte Nickel, which enables the opening of a bank account in a convenience store, complete with debit card, and with no more security than a mobile number. It’s ideal for those outside the banking orbit, such as immigrants, defaulted borrowers, the unemployed, and so on.
Guerrilla – fintech companies that exploit inefficiencies in banking and offer better service.
Interbank operation is a slow and expensive process for customers. ‘Guerrilla’ companies use new technologies and greater creativity to offer a faster and cheaper service to bank customers. So far, the clearest case of inefficiency exploited by fintech companies is ‘Forex trading’. Companies such as TransferWise (aimed at individuals) or Kantox (aimed at companies) are enjoying huge success by connecting buyers and sellers of currencies on its platform to make the transaction quickly and cheaply.
Samurai – compete directly with banks offering similar services to the same customers.
Competing with banks on an equal footing is a complicated task because of the enormous legal, technological and economic barriers that protect the business. Yet, some companies are ‘inroads’ into one of the most profitable sectors: private banking.
The custom (and expensive) treatment offered by banks to their best customers is being threatened by tools such as ‘portfolio management’ or ‘smart investment’ offered by the likes of Wealthfront, Nutmeg, Betterment, FutureAdvisor or Personal Capital.
In just a few questions, they create the customer risk profile and assess needs, and (via algorithm) the ‘optimal investment portfolio’ to the type of client that no longer values being received by advisory banks in luxurious offices with valuable paintings. They want more efficient solutions in the area of financial planning.
Double Agent – build on banks’ existing infrastructure.
This is one of the more interesting sectors by the confluence of business areas. The idea is to build on existing structures of banks (in technology, data and customer proximity) to offer new services. In this category, we find mobile payments (Apple Pay, PayPal, Square, iZettle, Venmo), aggregators (Mint, Simple, Open Bank Project), or big data and analytics companies (Context Relevant, Dataminr, Antuit, Ayasdi). It’s in a very extensive classification that we will delve into in more detail in another post.
What appears to be a win-win relationship (the customer benefits from a better range of services, and banks and fintech companies benefit from a growing market) actually represents a huge threat to traditional banking: they may lose direct relationships with customers and become a ‘dumb pipe’, which is what has happened to telecom companies.
Moreover, this division isn’t the exclusive domain of fintech startups – Google, Amazon, Facebook and Apple, and other companies such as Starbucks, have made a dent in this particular sector. Many experts argue that it’s these firms that will, thanks to their higher knowledge of the customer, own this market and turn banks into mere suppliers.
Invaders from Outer Space – offer a disruptive product or service with the potential to transform the financial industry.
In this area, bitcoin and its decentralized structure (blockchain) are the best known. In their DNA is the ability to completely transform the financial industry, leaving current incumbents to the side, yet their chances of failure are high. Nevertheless, companies such as Coinbase (a solution that facilitates the sale of bitcoins) recently closed a round of financing to the tune of €75m.
In successive posts, we will analyze the reaction of banks to this possible threat, ranging from inaction (whatever will be, will be) to an accelerated transformation trying to attract talent from other industries, and looking for a less hierarchical organization through investment in the most promising/threatening startups.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original Spanish article here.