The year 2019 belongs to digital banking. The rapid growth of fintechs and the growth of online banking and self-service offerings of traditional banks is causing more and more stationary bank branches to close. And this development will continue. What speaks for the positive future of digital banks, and how can traditional financial institutions coexist with them?
Banking and payment will shift more and more to the internet
In 2019, banking and payment will shift more and more to the internet. Digital payment services are driving this development significantly. Providers such as Paypal and Venno have increased the number of transactions by a whopping 24 percent from 6.1 to 7.6 billion transactions from 2017 to 2018. A trend that is unlikely to be demolished so quickly.
In the US alone, according to a 2018 Pew Research Center study, 71 million millennial’s live today. A Citibank study from 2018 found out that it’s this particular population that prefers to pick up their smartphones to do their banking online. And because, according to the Pew Research Center, this is about to replace the much more conservative baby boomers as the largest population. The potential market for digital solutions is very large.
The enormous willingness of VC, corporate venture and fintech specialist venture capitalists to further boost this digital pull.
The high level of investment also allows the new online and mobile first vendors to invest a lot of money in software development and product expansion and spend more on customer acquisition.
Customers reject opening hours and paperwork
For established banks, therefore, the ever more essential question arises as to which technical offerings they can use to defend their market share and defend their place in the market. Young customers in particular are now often reluctant to accept limited opening hours and stacks of paperwork. You claim to be able to check your account status via the app, to invest money or to make transfers.
Challenger banks such as N26, Revolut or Monese answer these needs. They are sometimes years ahead of the traditional banks in terms of user experience and technical implementation. And not only offer convenient app banking, but often also lower costs for international money transfers or even investment opportunities in cryptocurrencies.
Many fintechs have managed to fill clear market gaps that the traditional banking sector has overlooked or deliberately ignored so as not to cannibalize itself. For example, the American company Brex has achieved unicorn status in just two years. It is an enterprise valuation of over $ 1 billion. It sells credit cards to startups without the need for a personal safety deposit from the business owner, nor does it use a legacy third party system. The thresholds for a clear expenditure tracking for companies are thus lower and, incidentally, the credit line is also much higher than many other providers.
Another example is ID Finance, which offers its credit primarily in regions such as emerging markets, where access to finance is otherwise very limited. These companies have claimed market niches and technological innovations in the financial sector. From which they force their way into the market.
Co-operations between banks and Fintechs
While some of the fintechs are clearly attacking, others are quite willing to move closer to the traditional banks. And there are opportunities for their representatives to secure their own piece of the digital banking cake. An integration of technological components, as fintechs often offer them, is far more feasible for banks today than it was a few years ago.
The PwC study Fintech Cooperation Radar came to this conclusion in October 2018. Since 2017, the cooperation between banks and fintech has already doubled. The cooperation extends through the entire range of financial services. Banks prefer to cooperate with investment fintech, finance startups, online ID providers, payment fintechs or API based fintechs.
The option of peaceful coexistence between fintechs and the banking sector
Author Julian Riedlbauer, is Partner and Head of the German office of its Partner and Head of GP Bullhound’s German office. Before taking over the management of the German office, he was Managing Director of Corporate Finance Partners. An international financial advisory firm specializing in the Internet, media and technology. Previously, Julian Riedlbauer was a manager and entrepreneur in the IT and Internet market and has conducted various transactions as a client of consulting firms.
Thus, there is also the option of peaceful coexistence between fintechs and the banking sector. Traditional banks can become more agile and customer friendly through modern tech integrations. While fintechs can dock with the customer base and resources of traditional players. In the end, the latter have a big advantage on their side. While young companies have to slowly build their trust in their potential and existing customers. Established institutions are often perceived as reliable. This is the conclusion of a representative study of the BDB from 2018. In this context, the advisory network of established financial institutions plays a role. However, younger target groups in Germany in particular are increasingly making financial transactions or investments that are linked to advisory services online, as a study by Yougov from 2018 finds.
Digital Banking: From the branch to the network
This results in the task, which applies equally to fintechs and the traditional banking sector in 2019. The dense network of consulting services and financing offers that conventional banks have previously portrayed offline must now be transferred to the network with equal or better quality. If this succeeds, the digital banking and fintech sector will be in for a rosy period.
Also published on Medium.