The cardinal sin of legacy financial institutions was treating their ‘customers as cash cows’ says Jon Norris, head of content at RocketMill. Will the new generation of fintech players do it differently?
The great financial services unbundling of the past decade has been a joy to watch. Bloated institutions, creating huge value for shareholders - but little for society - have been cracking under the fiscal pressure of the financial crisis, and the reputational pressure of their role in bringing it about.
Meanwhile, advances in technology, slackening of certain regulations and a healthy sprinkling of innovation have birthed a new breed of specialist financial services company. Unburdened by the bad debt, expansive portfolios and bureaucracy of their forebears, these companies have changed the game immeasurably for the better.
Out with the old, in with the new
You know the companies I’m talking about. Monzo, the app-only bank account with more than one million customers. Revolut, the travel-friendly debit card recently valued at almost £2bn. TransferWise, the forex firm that doesn’t actually do forex (read up on them if you’re unfamiliar – their business model is a work of art), is saving users £50 million in fees monthly.
There are already a few whales in this nascent industry, and their success is inspiring others. Venture funding for fintech firms has grown from roughly $2bn worldwide in 2010 to $27.5bn in 2018 and shows no signs of slowing down. Looking at the UK specifically, the number of banking licenses issued leapt from eight in the 2016/17 financial year to 12 in the first 10 months on the following year, with a further 25 in the pipeline.
Meanwhile, Lloyds, Santander, RBS, Barclays and smaller banks have seen their share prices tumble by as much as 40% over the past four years, as customers realise there are better alternatives entering the market.
After decades of mystery and distrust, simplicity is now key
The common theme among these challenger brands is a relentless focus on a simple product and experience. They don’t have the sprawling estates of our legacy institutions, and this gives them the bandwidth to ensure they can create truly noteworthy differentiation within the small piece of the financial services landscape where they’ve planted their flag.
This gives them a powerful marketing message: we do one thing, and we do it damn well. Look at the straplines of the firms mentioned above and you’ll find a refreshing clarity of purpose: ‘A radically better account’, ‘Bye bye bank fees’.
These messages are especially resonant for people under 35 – the first generation not spoilt by high interest rates on savings, rubber-stamp mortgage approvals and cosy relationship banking. Our formative experiences of banking are more likely branch closures, technical failures and scandal heaped upon scandal.
Against this backdrop, the cloyingly nostalgic campaigns currently being pushed by some
High Street banks may ring utterly false. Speaking as someone who has held an account with Lloyds for more than half my life, my experience has been less ‘By your side for 250 years’, and more ‘Blocking your card overseas as often as we can’.
Building a banking ecosystem fit for the future
Fintech startups are dismantling the City’s towering institutions piece by piece. The first casualty of fintech’s ascendency won’t be replaced by a singularly better business model – as with Netflix and Blockbuster – it will be dismembered by nimble start-ups who can individually replace each part of a bank’s ecosystem with something far better. It will be a death by a thousand cuts, each with a natty logo and gifs.
The main argument I hear against this outcome is that people will still want to centralise their finances in one place. My contention is that when checking a balance, making a payment or switching funds around can be done in seconds on an app, the need for centralisation disappears.
Combine that with the data portability requirements of GDPR and the Government’s Open Banking initiative, and it’s easy to imagine a future where different apps manage different aspects of your personal finances, all the while talking to one another and financial advisers (who, by then, could very well be
The temptation to make the same mistakes
As these fintech firms grow, they will naturally cast around for new opportunities to expand, not least due to pressure from investors looking to bloat their valuations still further. You only make a 2% margin on current accounts, but car loans have margins of about 8% – let’s disrupt that industry too!
Unfortunately, this is exactly the same path taken by our largest financial institutions to get where they are today, and the destination hasn’t changed. Whereas Sampson Lloyd II started down that path at a fairly leisurely pace 250 years ago, today’s start-ups will probably be encouraged to treat it as a headlong sprint regardless of the consequences. Bolt on some high-margin upsells, set your sales targets and let your robo-advisers loose, and you’ve set the scene for the world’s most innovative misselling scandal.
It’s vital these fintech firms continue to play to their strengths. Do a few things but do them damn well. Maintain focus on delivering fantastic experiences for customers and resist the urge to diversify themselves into tomorrow’s Big Four, with all the debt, sprawl and bureaucracy that entails.
The cardinal sin of legacy financial institutions was treating their customers as cash cows to be milked dry through upsells, bolt-ons, bundles and hidden fees. By taking to Monzo, Revolut, TransferWise and others in droves, people are telling the market what they want – wouldn’t it be great if, this time around, the market listened?
This article originally appeared in The Drum Network Finance Supplement. For more information on how to get involved, please contact firstname.lastname@example.org
Jon Norris, head of content, RocketMill