This blog attempts to answer the following key questions at a high level:

• What could financial technology companies (fintechs) do to enable greater consumer or SME (customer) adoption of their products and services beyond early adopters?
• What could fintechs do to pull under-served and well-served customers away from incumbent banks and established providers?

Size of the UK market and adoption challenges

Before attempting to answer these questions, it would be opportune to define the potential size of the addressable market in the UK. Based on the ‘UK Consumer Digital Index 2018’ report[1], the estimated size of the UK consumer population that falls within the:

• High financial and high digital capability segment is 28.6 million
• Low financial and high digital capability segment is 14 million

Definitions of financial and digital capability can be found in the report itself. I would argue that the potential size of the addressable consumer market in the UK for fintechs is the sum of the above two i.e. 42.6 million.

Based on statistics published by the Department for Business, Energy and Industrial Strategy[2], in 2019 within the UK there were:

• 5.82 million small businesses (0 to 49 employees)
• 35,600 medium-sized businesses (50 to 249 employees)

Again, I would argue that the potential size of the addressable SME market in the UK for fintechs is the sum of the above two i.e. 5.85 million. Within both the consumer and SME markets, the nature of the specific product or service will ultimately determine how much of the market is actually addressable.

For a fintech to increase incremental active customers numbers from somewhere between 100,000 - 200,000 per year into their millions, a shift in thinking may be required, as it may not happen automatically. This may be due to the:

• Advantages currently enjoyed by incumbent banks and established providers
• Acquisition and adoption challenges already faced by incumbent banks and providers
• Adoption barriers faced by any new provider that are not unique to the fintech sector

The fintech sector may be relatively new, however the concept of providing low cost financial products and services online or via mobile is not new. Examples of this include:

• The online gambling, gaming and spread betting sector which generally operates a higher share of wallet and relatively lower (as compared to other sectors) annual active customer base model
• Electronic wallet providers which generally operate a lower share of wallet and relatively higher (as compared to other sectors) annual active customer base model    

Irrespective of the business model that a fintech may choose to operate, success truly lies in reaching a significant proportion of the addressable market, whether the goal is significant market share, higher margins or greater revenue. The reader may wish to look at the annual reports of a few providers within the sectors mentioned above in order to satisfy themselves.

Addressing the challenge of achieving significant adoption

This section sheds light on a specific set of remedies, that when implemented would give the desired uplift in customer adoption.

Advantages currently enjoyed by incumbent banks and established providers

One of the key advantages enjoyed by incumbent banks and established providers is trust. At the most basic level, a customer keeps their hard-earned money with their bank because they trust that their bank will keep their money and data, safe and secure. If they did not believe this to be the case, then they would simply not keep their money with that bank. During the sub-prime financial crisis, we have seen how retail customers react when this trust is eroded. The vast majority of the UK population keeps their money with the incumbent banks; therefore, they must trust the incumbent banks irrespective of whether they like or dislike their bank or banks as a collective.

All the other products and services that a bank provides to its customers, including the ones the fintech sector is attempting to unbundle, are provided based on this fundamental trust and is a cornerstone of the relationship between a customer and their bank.

Similarly, trust needs to be a cornerstone of the relationship between a customer and their fintech, in order to enable significant adoption of a fintech’s products and services beyond early adopters. Fintechs need to build high levels trust with their customers and the neo-banks have demonstrated that it can be done.

Acquisition and adoption challenges already faced by incumbent banks and providers

The incumbent banks have been in business for hundreds of years, if a one size fits all product or service, that perfectly met the needs of all its customers existed, (i.e. within a category e.g. unsecured lending) then the incumbent banks would already be providing that product or service. This is because, they have had enough time to optimise their products and services to meet the market’s needs. This would also mean, that the needs of the vast majority of retail customers would have already been met and there would be no need for regulations such as PSD2 and open banking to exist.

This is clearly not the case, there is no one size fits all product or service within any category of retail banking services that meets the needs of all its customers. Therefore, in order for fintechs to pull customers away from the incumbent banks or established providers, they must meet the needs of their potential customers, far better than the incumbent banks or established providers do.

Switching from an incumbent bank or established provider to a fintech requires potential customers to change their behaviour, therefore fintechs must go even further by:

• Creating tailored products and services that meet the needs of their customers exactly or as closely as is possible
• Providing incentives such as a cost saving, time saving or convenience in order to help potential customers overcome their resistance to change and make the move to the fintech

The most practical way to do this may be to segment the market and focus on meeting the needs of specific target segments really well. Therefore, fintechs must segment the market, develop an in-depth understanding of the needs of their target segments and ensure that their products and services meet those needs.

Adoption barriers faced by any new provider that are not unique to the fintech sector

The novelty of a fintech’s product or service that attracted early adopters, may also be the reason why the rest may not be so eager. This is because in addition to just lack of awareness, the segment specific benefits (benefits over and above what an incumbent bank may provide) may not be clear. The segment specific trust issues may have also not been addressed as yet. Therefore, fintechs must also ensure that their products and services are positioned and communicated correctly to their target segments. This means that fintechs must:

• Optimise their customer experience, brand promise, benefits & trust messaging in order to maximise adoption amongst their target segments
• Communicate their brand promise, benefits & trust messaging to their target segments through the right channels in order to create awareness of their products and services

This would be the case whether the fintech is start-up or an established provider looking to leverage their existing brand, as the segment specific benefits & trust messaging would still need to be communicated.

In Summary

The solution to greater customer adoption is not a ground up redesign of a fintech’s customer facing proposition, but fintechs need to:

• Build high levels of trust with customers
• Optimise their products & services, customer experience, brand promise, benefits & trust messaging in order to maximise adoption amongst their target segments
• Communicate their brand promise, benefits & trust messaging to those target segments

Together, these would give greater penetration amongst the target segments. Once adoption within the target segments reaches critical mass, word of mouth will then in turn ensure far wider adoption.

In the next blog, I have gone into more detail on the points made here at a high level e.g. how would fintechs go about building trust with their customers - https://www.finextra.com/blogposting/18481/fintech-customer-acquisition---building-customer-trust

Haydon & Company Limited | rishi.chauhan@haydonandco.com

All external research and reports have been referenced explicitly. The views expressed in this blog are solely my views and not of the organisations that produced the reports that have been referenced in this blog.

[1] Pages 12 to 14 - https://www.lloydsbank.com/assets/media/pdfs/banking_with_us/whats-happening/LB-Consumer-Digital-Index-2018-Report.pdf

[2] https://www.gov.uk/government/publications/business-population-estimates-2019/business-population-estimates-for-the-uk-and-regions-2019-statistical-release-html