A consumer perspective on FinTech disruption (part 3)

This is the final blog in my three-part series on the disruptive impact of financial technology (FinTech) firms on today’s banks. The blog series is based on the findings of CGI’s 2016 survey of 1,670 consumers across 8 countries, which assessed consumer perspectives on 12 leading digital FinTech services.* As FinTechs increasingly invest in these services, they’re posing a real threat to the customer bases and revenues of traditional banks.

In the first blog, we look at which of these 12 digital services consumers value the most, along with their awareness and usage. The second blog covers their purchasing obstacles and provider preferences. This last blog shares some key recommendations for both banks and FinTechs as they compete to meet evolving consumer expectations and position themselves for growth.

Recommendations for banks

As FinTech firms aggressively and innovatively push their way into the financial services space, established banks are increasingly focused on effectively responding to the competitive threat. Here are a few recommendations for these banks to consider as they work to solidify and strengthen their future competitive position.

1. Invest in protection capabilities for the bank and customer: CGI’s survey shows that fear and trust are big issues with consumers. Consumers are afraid of data and identity theft, as well as fraud. They want and expect banks to increase their level of security.
2. Define and own your innovation strategy and roadmap: Make sure your innovation strategy is unique to your strategies and opportunities. Don’t just follow another bank’s strategy because it is getting good media coverage.
3. Innovate internally and through FinTech partnerships: Balance what you need to do internally versus through partnerships. A case in point is the rise in robo-advisors. Many robo-advisors are FinTechs, but some incumbent players, like Schwab, have innovated internally to develop their own robo-advisory services to meet market demand. In other cases, banks are successfully partnering with or acquiring FinTechs to deliver new services that would take too long for them to develop themselves.
4. Maximize proof-of-concepts/pilots while minimizing customer risk: It’s unwise for a traditional bank to just “slap on” a new FinTech service. Despite initial vetting, there are likely to be issues that put customers and the bank’s brand at risk. To minimize these risks, invest in proofs-of-concept and pilots before launching new services.

Recommendations for FinTechs

Despite the headway they’ve made in launching new value-added digital services and gaining market share, FinTechs face a major challenge. CGI’s survey shows that consumers overwhelmingly prefer their current financial institution, mainly due to a lack of trust in new service providers. Getting access to consumers and gaining their trust are significant hurdles for FinTechs.

Here are a few recommendations, however, for overcoming these hurdles.

1. Rethink your exit strategy: Many FinTechs want to become the next PayPal by directly connecting with consumers, delivering innovative services and then launching an IPO. But, this won’t be a successful path for most players because consumers overwhelmingly prefer to receive these new services through banks. A more surefire path to success is to partner with banks instead.
2. Partner to gain access to customers: Gaining the trust of consumers who prefer traditional banks is a formidable task. When FinTechs first came on the scene, most did very little marketing. While more are investing in marketing today, they lack sufficient resources to gain a critical mass of direct customers. Partnering with banks is a low-cost, effective way to gain access and address the challenge of building trust.
3. Get deep customer input early and often: Successful FinTechs aren’t just launching new services. Instead, they’re investing in understanding customer expectations through, for example, focus groups, panels, beta launches, surveys, etc. Ensuring that your offerings are shaped by customer input is fundamental to gaining an edge.
4. Educate customers to increase awareness and trust: In addition to partnering with banks, leading FinTechs are investing in customer education to gain trust. They’re educating customers on processes, pricing and value propositions and, in turn, building stronger customer relationships.

Overall, the competition between FinTechs and traditional banks can set up a classic “zero sum” game, with consumers as the prize to be fought over, unless the two players work together to compensate for their individual challenges. Through partnerships, FinTechs can get access to customers who are hesitant to trust new players, while banks can benefit from new products and services that expand and deepen customer relationships. Both banks and FinTechs should consider ramping up their pace of partnerships to take advantage of the opportunity to work together for the benefit of customers and themselves.

For more insight, I encourage you to download our survey, “FinTech Disruption in Financial Services.” Also, feel free to contact me with any questions.

* Protection, personal finance management (PFM), mobile payments, personalized digital experience, IoT-based auto insurance pricing, personalized offers, bartering, alternative currency, mobile cash flow manager, P2P lending, robo-advice, and alternative credit scoring