There is no single model for how a Fintech starts up. In this section, we will discuss the principal three types of Fintech, which applies to banking, insurance, and wealth management:

  1. Standalone start-ups;
  2. Incumbent bank-led;
  3. Technology and telecom giants.

Standalone start-ups

These are usually started by like-minded entrepreneurs who may or may not have worked within financial services but have a passion to disrupt the status quo for the consumer’s benefit. Before regulatory changes were introduced, the barriers to enter the industry often prevented new banks starting-up. The main barriers to entry cited were the amount of capital required by regulators and the inertia of consumers to switch banks, particularly to a new entrant. In the UK, Metro Bank, which launched in 2010, was the first bank in over 100 years to be granted a banking licence.

Following the GFC, the relaxation of regulatory requirements to stimulate competition, innovation and consumer choice made it easier for new banks to receive regulatory approval. New Internet-based technology and the easy availability of venture capital made it happen.

These fintechs use technology and data to streamline retail banking by offering better convenience and pricing, often free where other banks charge. In the UK, this was stimulated by progressive regulators promoting competition and break up the banking monopoly. Atom, Monzo, Tandem and Starling took full banking licences. Revolut has a Lithuanian banking licence (which allows it to operate across the EU). Technology platforms can be built in-house, as Starling and Monzo did, or assembled from vendor solutions, as happened with Atom and Tandem in the UK.

It is hard for challengers to offer the same wide-range of products offered by incumbent banks, and directly compete with these behemoths. Instead they have sought to differentiate themselves by:

  • Focusing on specific product segments at attractive pricing versus a full suite of banking products – an example being Revolut who initially targeted foreign exchange costs and the Starling Current account that targeted overseas spending fees.
  • Technology, which is kept simple by not offering a wide range of products and services and is built around a mobile-native offering.
  • Offering the same service at lower revenue margins versus incumbent banks by benefiting from the absence of legacy banking systems. The challenge of an incumbent’s digital journey is that its mobile banking applications are still running on a legacy core banking system. Hence, the digital experience of customers can be clunky as can the pace of innovation versus newcomers.

Incumbent bank-led Fintechs

There’s also the possibility that a Fintech can be created by a forward-thinking incumbent that recognises it must evolve or ‘die a death by a thousand cuts’, or that it can better serve a significant segment of customers through a new digital-led proposition. To ‘die by a thousand cuts’ means that it is not one or two competitors that will destroy their business, but literally thousands of new competitors with which it cannot compete.

Instead of adding another layer to their legacy systems many incumbents created a new fully-digital bank to help meet an evolving set of customer expectations quickly and effectively.

These more forward-looking incumbents are setting up new fully-digital businesses with two objectives. The first is to counter the effect of multiple new, more nimble competitors whose digital-based propositions appeal to more of the population as age profiles change (‘Millennials’ and ‘Gen Zers’ get older and continue to prefer digital, ‘Baby Boomers’ eventually stop using banks all together). The second is to provide a medium-term solution to the aging legacy technology platforms that are in need of replacement. It also avoids the ‘big bang’ approach to core banking transformation that goes wrong on so many occasions.

Setting up an independent challenger bank needs to be clearly differentiated from digital transformation and core banking overhauls undertaken by incumbent banks. The former results in the set-up of a new bank with independent application programming interfaces (APIs) and technology stack and is a significant departure from the incumbent bank’s operating model.

Technology and Telecom Giants

Finally, a Fintech can be launched by a business traditionally outside of financial services that recognises an opportunity to broaden its user proposition by expanding into financial services. This is often driven by ecommerce that complements their core business, such as the Internet and communications. In view of their huge user bases, these Fintechs are often cited as being the biggest threat to traditional banks and new Fintechs alike.

Typically, they don’t pursue a full banking, insurance, or wealth management approach, but ‘cherry pick’ the most lucrative services that closely align to their core business, avoids heavy regulation (using the new lighter regulations), capital costs and liquidity requirements.

There are many businesses taking this approach, and we’ll look at two groups collectively known as ‘GAFA’ and ‘BAT’.

The emergence of what is often called ‘Big Tech’ such as GAFA (Google, Apple, Facebook, and Amazon) and BAT (Baidu, Alibaba, and Tencent) in financial services has led to heightened competition in the financial services sector.