Rise of the FinTech - A threat to Retail Banking Business Model

Banking industry is going through a massive disruption cycle. And Retail banking is at the center of it. Fee and interest based revenues are under pressure. Traditional retail banks are facing a structural vulnerability issues like, shrinking deposit due to increase in alternate investment options, lack of innovation around product and services due to focus on rebuilding balance sheet and reputation, reduced advisory and cross sell and upsell influence to capture higher wallet share due to emergence of independent online aggregators providing access to best products, threats from emerging business models like  P2P lending having a negative impact on interest based revenues etc & finally threat from non-banks (i.e. google and Apple, Telco, Retailers, payment service providers etc) who will innovate around core banking services to restrict Banks ability to provide integrated value added services.

Going by the trends, FinTech disruption is going to further accelerate due to:-

• Low entry barrier for challenger banks - Cost of setting up a new bank is low. According to Deloitte cost of setting up a small bank is 10 M GBP. And subsequent run cost is 5 M GBP.
• Open regulatory environment - Regulators support for the Fintech industry for providing transparent and level playing field. This is enabling new business models to be developed whilst protecting consumers. Innovative business models around crypto currency (Bitcoin etc), peer-to-peer lending (or crowdfunding), Crowdfunding platforms are already approved by regulators.
• Availability of funding - Interest from angel investors, emergence of accelerator and incubator schemes (eg Techstars, Startupbootcamp and Level 39 etc), venture capital fundraising, private equity investor are helping start-ups to grow further. In addition to that, government also started to support the availability of capital (for example British Business Bank).

It is worth noticing that, while US has led the FinTech innovation, UK and Ireland are currently the fastest-growing region for Fintech investment. UK Fintech is currently worth £20 billion in revenue. Fintech is estimated to be worth £300 billion to the UK economy by 2020.

FinTech start-ups are taking advantage of the situation and further exploit the structural vulnerability of the retail banking business model and disrupt the business. Following are the key areas, where FinTech is making fast progress and beginning to be seen as alternative to traditional retail banking.

Lending

Post financial crisis, Financial institutions were unwilling to spend the time and money on performing due diligence for individuals and small businesses with low credit ratings. This resulting in many fintech's providing alternate options like OnDeck, Wonga.com, Kabbage, CANCapital, who created a market around short term loans. Others like LendingClub, Prosper Marketplace providing P2P lending and they are able to provide unsecured personal loans at fixed rates for terms up-to five years (borrowers pays a small fee based on credit Rating and investors pay  small annual servicing fee).

Personal Finance

Independent financial advising is becoming popular day by day. And customer expect banks to go beyond cross sell and upsell of their own products and become a true E2E personal finance adviser.  For example Mint.com is a free web-based personal financial management service which allows users to track bank, credit card, investment, and loan transactions and balances through a single user interface as well as make budgets and goals. Paymoolah created a goal based finance advice and gamification services platform; BillGuard is providing personal finance security and productivity, its mobile and website application scans credit card and debit card transactions, alerting users to possible scams, billing errors, fraudulent charges and hidden fees. HelloWallet provides independent and personalized financial guidance to members and relies on behavioural economics to incentivize workers to implement its advice. Wallaby Financial helps consumers get the most out of their credit cards by optimizing usage based on individual preferences. It can optimize credit card usage for rewards, credit limit, statement due date, linked bonuses, and other factors.

The innovation is not restricted to only personal advising, but into personal credit scoring - for example Credit Karma is a free credit and financial management platform which provides credit tools, such as a Credit Score Simulator, which simulates the effect of potential financial actions on a user's credit score; and tailored financial recommendations based on each individual user's credit profile.

Payments

Payment origination process is going through huge disruption process led by fundamental change in the fee based revenue model and user experience for paying.

Apart from known figures like Paypal (low cost merchant services and online portal wallet services), Square (financial services, merchant services aggregator and mobile payments services through Square reader) we are seeing other start-ups jumping into the fray. For example, Stripe services allow lower total cost to customer because it has no setup fees, monthly fees, minimum charges, validation fees, card storage fees, or charges for failed payments. WePay built a payment API's exclusively on platform such as crowdfunding sites, marketplaces and small business software. Through this API, WePay allows these platforms to access its payments capabilities and process credit cards for the platform's users. ReadyForZero provides online, personal financial management tools for paying off debt.

Retail investment

Retail investments start-ups are opening up new investment avenues. It is not only providing facilities to invest in High Tech assets, but also bring the transaction fees down and sometimes providing it for free. For example, Motif allows investment in asset classes like cybersecurity, cloud computing or even 3-D printing. Robinhood allows individuals to invest in publicly traded companies and exchange-traded funds listed on U.S. exchanges without paying a commission. SigFig will tailor a portfolio and keep it balanced and diversified with low fee. Kapitall is gamifying the stock trading experiencing and test out any stock market theories with a test account. It is also allowing interact with other traders, share ideas and grow net worth. And with its virtual cash portfolio, users can test  investing skills risk-free.

Remittance

Remittance is another area where start-ups are taking away the commission based revenue for the banks. For example, Xoom provides digital money transfer services to Europe, Canada, Australia, Latin America, the Philippines and India at lower commission rates. CurrencyFair is another example of an online peer-to-peer currency exchange market place which provides better exchange rates.

Consumer Banking

All digital channel based banks are also making entry into the market with much lower cost base and operating cost. For example, Movenbank is a mobile financial service provider which allows spending money from your mobile device and provides instant feedback on your transactions and spending patterns. Simple (Bank) follows all digital channel approach and provides account-holders with a Visa debit cards and have access to an online banking system accessible through Simple.com or mobile apps. Vudubu is online banking and Pre-Paid VISA Debit Card service, works as a traditional bank account and Pre-Paid VISA® card. With the card, client is able to provide Online and Mobile Banking, World Wide secure Pre-Paid VISA Card shopping (Virtual & Physical), Friend Sourcing, Deal of the Day, instant reward redeem and privilege loyalty program, Online utility payment service.

The trend of FinTech disruption seems to be irreversible at the moment, and future retail bank will be restricted to providing core banking services unless they go on a massive consolidation and buy out to provide e2e services. Whatever be the case, we are entering the age of the customers, and I believe we have an exciting road ahead.