FinTech drivers and facts: analysis of the World Retail Banking Report 2016

In a YouTube video, Capgemini Group shares some of the key findings of the World Retail Banking Report 2016, as traditionally conducted in collaboration with Efma.

When announcing the new report in April 2016 Capgemini strongly focused on the rise of FinTech companies or FinTechs, who are disrupting retail banking. According to the press release 63.1 percent of customers across the globe are already using FinTech products or services.

And it’s not just in retail banking. FinTech companies and their cloud applications are also changing the game in, among others, wealth/asset management with the rise of robo-advisers which we covered in another article, and in insurance where we don’t talk about FinTech but about InsurTech.

Fintech concept

Customers love FinTech – retail banks know it

Back to the World Retail Banking Report 2016 (in order to obtain it you need to register here where you can also find more videos and resources from Capgemini).

63.1 percent of customers across the globe use FinTech products or services.

In an accompanying infographic, which you can see below, the authors emphasize that retail bankers today are underestimating the impact FinTech firms have on their customers.

With 63.1 percent of customers using FinTech products or services that’s probably not the best idea. No wonder that retail banks and, for that matter, other financial institutions are stepping up their game in 2016 to come up with their own services, to join forces and, importantly, to collaborate with FinTechs or to see how they can fit them into the growing digital banking ecosystem in which they reside.

The approaches regarding the collaboration or non-collaboration with FinTech providers differ a lot as we will tackle in another article. It among others depends on region, type of financial activity/service, ‘culture’ and the individual context of the bank or financial services provider but it’s clear that the trend is unstoppable.

The success of FinTech in emerging markets

Going back to the World Retail Banking Report 2016, we see that geographical differences apply to the usage or adoption of FinTech products and services too.

As the video states, adoption of fintech is mainly high in emerging markets and as you can see in the infographic, in North America 59 percent of customers adopted FinTech. In Latin America (LATAM) however it’s already a whopping 77 percent. In Central Europe 69 percent of customers use fintech products/services and in the Middle East & Africa (MEAF region) 64 percent of customers does.

This means that North America and the APAC region (Asia-Pacific) have the lowest FinTech adoption (both 59 percent) and that all the mentioned emerging markets do better. They also do better than Western Europe where adoption is 61 percent.

The usage of FinTech products and services is highest in emerging markets, with LATAM taking the lead.

Part of this phenomenon is understandable, part needs more explanation as, when it boils down to VC investments in FinTech startups and the location of FinTech hubs, there is often less activity in these emerging markets.

In the Middle East, for instance the climate for FinTech players is only now starting to change with some recent announcements from GCC (Gulf Cooperation Council) countries.

It’s all about customer expectations – and speed

Still, the phenomon is clear: FinTech is important for consumers across the globe.
Among the most cited reasons are the feeling that FinTechs offer faster services (81 percent of customers) and the fact that FinTechs are providing a good experience (80 percent of respondents feel so).

FinTechs are champions in understanding customers and offering what they need

Reality is indeed that, on top of geographical reasons (think about the success of mobile services in some parts of Africa), fintechs are really increasingly gaining traction because they have benefited from a lacking speed of innovation, slow systems/processes, back-office and front-end disconnects, too many silos, a lack of focus on changing consumer expectations on the level of ease-of-use and of customer experience realities as shaped by experiences in other industries, not adopting fast enough to mobile and digital preferences; and much more.

The inability of banks to innovate leaves the door wide open for FinTech providers to attract new customers (source)

In fact, often FintTchs have done more homework in truly understanding the needs and wants of bank customers, enabling them to offer what they seek. And that pays off as the success of FinTechs can be partially explained by the power of the human network, specifically word-of-mouth and referrals. In the video you can see and hear that customers are more likely to recommend FinTechs to their friends and peers than they are to recommend banks (respectively 55 and 38 percent).

With king customer in mind the good news is that banks increasingly start seeing FinTechs as partners (65 percent of respondents), while only 28 percent see them as competitors and 7 percent think they are not relevant.

Customer experience perception gaps: banks must face realities

For retail banks who seek partnerships with FinTechs it’s important to remember these key drivers of customer adoption of FinTechs: their expectations and, simply behavior, whereby customers want choice, omni-channel customer service and those excellent experiences, also on digital and mobile platforms.

Customers are more likely to refer friends to a FinTech than to a bank.

In this regards, there is a challenge, a gap in perceptions really. As mentioned, the fast services and good experiences offered by FinTechs are cited by respectively 81 percent and 80 percent of customers when they are asked how they feel about them. And feelings and emotions of customers are everything when you want to focus on customer experience, after all the sum of experiences.

Yet, when asked about how THEY feel about FinTechs services, only 36 percent of responding bankers cite the fact that FinTechs offer fast services. When it boils down to that good experience offered by FinTechs, only 40 percent feels this is the case. Indeed, (again) a serious gap in perceptions. Bankers who want to succeed will have to keep in mind that it’s not their feelings which matter but those of their customers.

The only thing that consumers and bank executives seem to agree on is that FinTech products and services are easy to use as you can see in the video (82 percent of consumers and 89 percent of bank execs feel so).

FinTech and retail banks: the opportunities of collaboration and cross-fertilization in a digital banking ecosystem

Although some say that retail banking won’t exist anymore within a decade or so and that everything will be digital, we are a bit less ‘all or nothing’ and believe there are excellent opportunities for banks and certainly lessons to be learned.

65 percent of bank executives see FinTechs as partners.

Moreover, as the report’s infographic indicates, the large majority of bankers (96 percent) say that the retail banking industry is evolving towards a digital ecosystem. They have strengths such as customer trust (although research shows that FinTech users trust providers a lot as well, otherwise they wouldn’t use them), a large customer base (so they can deploy relatively fast, certainly if they join forces with others as we see happening) and, last but not least they have extensive expertse with regulators (crucial in banking and financial services of course, the regulation, security, data privacy and compliance challenge is not the easiest one).

The willingness to partner with FinTech firms is a recognition that banks are unprepared to operate in a future that consists of a series of secure digital interconnections (source)

FinTechs on the other hand tend to be more agile, innovative and able to attract the digital-savvy consumer with younger generations as usual taking the lead. Whether that is just because they are just more digital-savvy is another question. Expectations do play a role as well. And let’s not forget that very often ‘new’ technologies and services are adopted first by younger generations and then gradually by other age groups. Just look at the history of the Internet and the Web, same picture.

However, inevitably, Gen Y comes in the picture again. And, even of we are not big fans of these generalizing generational labels, the report did find that this ‘younger’ segment which we know as Gen Y or Millenials is more likely to use fintech than the others by up to 16 percent, even if adoption occurs across all age groups as you can see in the video.

The challenges for retail banks in FinTech and beyond

Two big challenges for retail banks are to find the right forms of collaborations as we move to a hybrid ecosystem (and there are several forms) and to make sure their processes, information sources, capabilities and core systems are ready to evolve towards a digital ecosystem.

And while 96 percent of bankers agree that is needed as previously mentioned, 87 percent say their core systems cannot support it (indeed, only 13 percent have the right systems in place…).  It can be one of many reasons why collaborations with fintechs offer opportunities.

Only 13 percent of retail banks have the right systems in place to move to a digital banking ecosystem.

While in some countries banks are replacing legacy systems fast, in other countries banks keep holding on to them, rather trying to add more on top of them to enable what they need. Even if banks move at different speeds, geographical differences apply and not all banks deal with legacy systems the same way, it’s exactly the absense of legacy systems (with a clear choice for 3rd platform technologies such as the cloud, to name one) that offer FinTechs important benefits.

As the video says, FinTechs can better leverage technology to develop innovative solutions and services, can launch them faster and can offer them at a far lower cost thanks to operational efficiency.

And also here banks see opportunities as it’s, among others this cost aspect (how else could it be in the highly competitive market of retail banking) that makes many banks look at fintechs, although cost reductions certainly shouldn’t be the sole reason!

The FinTech Revolution - infographic World Retail Banking Report 2016 - source and more formats in press release
The FinTech Revolution – infographic World Retail Banking Report 2016 – source press release – more formats here

Customer experience optimization and innovation to drive revenue

Obviously, another huge challenge is to make sure that customer expectations are met and that customer experience keeps being optimized so that it translates in profit.

And that brings us to another important finding of the 2016 World Retail Banking Report by Capgemini and Efma.

After a year of stagnation (2015), the investments of banks in digital and in customer service have started to pay off in terms of customer experience, the World Retail Banking Report 2016 found. Positive customer experience grew by 2.9 points (download the report for more details and the methodology). Moreover, the Customer Experience Index of the research saw increases in approximately 85 percent of countries.

Lowering costs is an important reason why banks look at FinTech – but it should be about more.

The only (big) problem: it hasn’t led to, what in the end matters to the bank: profitable behavior on the customer side such as higher retention, more referrals (remember FinTechs have higer referrals according to the report) and up-selling and cross-selling.

Again, collaboration with FinTechs can help. One of the expectations regarding the collaboration between banks and FinTechs, is that, on top of enabling banks to reduce costs and being more agile, new services and revenue streams can be created, experiences can lead to higher retention and more referrals, existing offerings can be enhanced (for instance, white-label services, as we also see in the space of wealth and asset management) and much more.

Collaboration is key in an API, data and DX economy

Collaboration is what it increasingly will be all about, especially as most FinTechs are experts in the digital customer experience.

In fact, collaboration is the name of the game in the data, API and DX economy anyway, not just in banking. No company can do it all alone, it’s an essential given in all digital transformations in function of any possible outcome and even more so with the user and customer in mind.

On top of rethinking their IT infrastructure and revamping core systems, “establishing full competency in API-based software development will be high priorities” in the retail banking industry, the press release of the report says. And that is crucial for the development of new revenue streams and offerings.

Thanks to these APIs, short for application programming interfaces, all those new opportunities become possible. APIs obviously are far from new and omni-present, they allow data to be leveraged to create new digital services and experiences. A range of banks and financial service providers across the globe have published APIs to maken an open banking approach more possible and several even haven an ‘API-first’ approach or, at the very least, an API strategy.

They are so essential in fintech and banking that in the UK, for example, the CMA (Competition and Markets Authority) in August 2016 required banks to develop a set of core open APIs in the context of accelerating technology transformations in retail banking.

But that, and the API economy, is a story that deserves attention in another article as APIs are crucial in FinTech, banking and digital transformation overall. And there are many APIs in retail banking already.

You can download the full report on worldretailbankingreport.com.

Used sources for the overview, comments and analysis of the World Retail Banking Report 2016 in this article:

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