It is important to understand the reasons for the origination of Fintech banks. Many reasons have been discussed, but we’re going to focus on some of the fundamental changes that occurred after the Global Financial Crisis of 2007 to 2009.
Fintech-type businesses had been around for some time, and some of the earliest companies started up before the Global Financial Crisis. Several factors sped up it into the ‘Fintech Revolution’.
The ‘Fintech Revolution’ may have started in the UK and Europe, but now there are start-ups across the world. Most are local to a country or region, but a few are becoming global, for example Revolut.
Because the list of Fintechs is every growing, we won’t be addressing individual Fintechs or countries, except where it provides a specific example.
So says Anne Boden, founder, and CEO of Starling Bank in the UK, who being disillusioned with banks’ response to emerging customer needs, launched her own fully digital retail bank in 2014.
Several factors played a part. There was an emerging middle class in Asia, Africa, and Latin America. Consumers, especially Millennials and Gen Z cohorts, demanded a more digital experience, but many banks were still focused on an ever-shrinking branch network.
As we have stated in Business Models module, banks lost their customers’ trust. Many looked for banks that offered simplicity and higher levels of transparency, and did banking the way younger consumers wanted, conveniently and efficiently.
Entrepreneurs saw an opportunity for new app-based banking and cloud-based technology to attack attractive revenue streams, such as foreign exchange, where banks had previously enjoyed a monopoly. Incumbent banks’ technology couldn’t deliver what customers wanted as the old and fragmented technology of banks (often called ‘stacks’) couldn’t deliver the customer experience or efficiency required by consumers who were increasingly using technology in their daily lives.
This also applies to insurance and wealth management.
This was as important as technological change. Financial services such as banking, insurance and wealth management are highly regulated, and this can lead to a concentration of banks and businesses that have low levels of competitiveness. Most countries have a ‘Big 4’ or ‘Big 5’ banks that dominate the personal and SME markets, typically accounting for up to 80 per cent of the market between them.
In 2010, a UK challenger bank called Metro Bank was awarded the first banking licence in over 100 years. In 2013, the UK’s banking regulator, the Financial Services Authority (now called FCA), relaxed the regulatory requirements for new banks in order to stimulate competition and give consumers and SMEs a wider choice.
Other enlightened and supportive regulators have sought to promote Fintechs as a solution to over-concentration and consequent lack of competitiveness and consumer choice.
Large technology companies known as ‘Big Techs’ moved into payments and financial services and started offering these products to their huge user bases. The Big Techs are often social media or telecoms-based platform companies (this is particularly true in China), and we’ll examine what they are doing later in this module.
As we’ve stated in other modules, digital transformation isn’t just about the technology. It’s about the organisation’s culture, especially concerning a customer-centric culture that focuses on the needs of the consumer or SME owner.
Since the Global Financial Crisis, traditional banks have suffered from a loss of trust and loyalty arising from their culture, often described as ‘toxic’ and self-serving business practices. Fintechs usually position themselves as ‘not being like big banks’ and having a more customer-centric culture.
Change met with favourable regulation and funding environment.
In the aftermath of the GFC, there was a huge expansion in venture capital because of quantitative easing by many central banks. Because they don’t lend to corporate businesses, new Fintechs are not hugely capital intensive and offer a potential for quick and large returns on investment.
One aspect often overlooked is Fintech’s opportunity to help the people underserved by banks, or those who cannot access basic banking services because of technology (such as having to own a computer) or cost to service constraints. Low-cost accessible platforms, such as mobile phones, now make this under-serviced sector a good opportunity.
Underserved didn’t just apply to individuals: other fintechs were set up to underserved SMEs, one of the first being OakNorth in the UK.
Many Fintechs aim to increase inclusivity serving the under-banked and unbanked, such as migrants, and good examples are Safaricom in Kenya or Monese in the UK.
It wasn’t just one thing: All these changes contributed to the Fintech Revolution.