After a busy couple of months with many interesting developments in fintech, I’ll be taking a couple of weeks hiatus from updating my blog for the summer. Feel free to check out my previous posts from the last couple of months in the meantime.
Not only are established companies from converging industries challenging the existing ecosystem, but the number of unicorns in fintech steadily increasing, with P2P Lending as one of the areas of high potential for disruption as well as bitcoin and blockchain as a potential game changer. I have also given a reminder that regulations are not always a constant, and Iceland’s proposed change in the monetary system is a brilliant example.
As the financial industry is facing similar challenges the media and telecom industries faced 10-15 years ago, incumbents from those industries now look elsewhere for new revenue streams. Where telecom operators are targeting the “underbanked” segments in developing countries through mobile banking, the media industry is aiming for the customer interface for financial services in its home markets.
For the media industry, digital advertising is not nearly as profitable as print advertising, and much of the online ad revenues now belong to Google and Facebook. I order to keep up with the competition, media companies like Schibsted and Bonnier are looking to the financial services ecosystem for new business models.
As an extension to user payments, classifieds and premium subscriptions, Schibsted has established its own payment solution through Schibsted Payment in order to improve existing business model by gathering user data and providing targeted ads.
In addition to payments, both Schibsted and Bonnier are investing heavily in comparison tools and marketplaces for financial services through both wholly owned services as well as investments through venture capital subsidiaries like Schibsted Growth and Bonnier Growth.
Schibsted has through Schibsted Growth invested in several fintech companies. Notable acquisitions include Lendo, a comparison site for unsecured consumer loans and price comparison site Compricer. Schibsted is also targeting digital payments through the investment in the cash back service kickback.no. With the rise of digital payments it is predicted that loyalty programs and analysis of customer insight based on transaction data is the new competitive advantage.
Bonnier is also targeting loyalty programs for digital payments, and recently increased its ownership in Refounder, Swedens largest and fastest growing cash back site through Bonnier Growth. In addition, Bonnier is the primary investor behind NFT Ventures, a venture firm focusing solely on nordic fintech investments.
The predicted unbundling of banks will result in a fragmentation of financial services where one stop shop model of banking is replaced by many specialized service providers. This potential future for financial services favors those who manage to re-bundle banking in a customer centric way.
These days everyone wants to create the next Uber for anything, and the word “disruption” is mentioned across boardrooms and management meetings in nearly all industries. But while discussing the true meaning of disruption and which fintech startups are worth keeping an eye on, incumbents are at risk of overlooking players that once were customers and partners that can quickly become new digital competitors.
Large retailers are launching their own consumer banks, payment services and credit cards based on customer data, brand loyalty and capital reserves in mature markets. At the same time, telecom operators are targeting the “underbanked” segments in developing countries through mobile banking. This makes perfect sense since one of the missions inside thefintech revolution is financial inclusion.
One of the most notable successes is the mobile-based money transfer and micro financing service, M-Pesa by Vodaphone and Safaricom. With 18 million customers and more than 80 000 agent outlets, M-Pesa has altered the landscape of financial services in Kenya, and is expanding rapidly in Tanzania. Since the funds are held by a trust deposited in several commercial banks, M-Pesa receives a lighter regulatory treatment than full banks, which allows a more agile business model than incumbents.
Telenor Group is another telecom operator that is getting heavily involved in financial services in developing economies. As one of the largest telecom operators in Pakistan, Telenor has also grown its money transfer service, Easypaisa to 13 million customers and reports that financial services account for 9 percent of Telenor’s total revenue in Pakistan.
The common denominator for all these initiatives is that they are done in collaboration with financial institutions, but convergence is a gradual process and Telenor has taken the next step by establishing a full-scale bank in Serbia through the acquisition of KBC Banka in 2013 together with Société Générale.
While Société Générale acquired the traditional brick-and-mortar customers, Telenor utilized the banking license and created a web- and mobile-based bank that has 50,000 account openings within the first six months of operation. Telenor states in an interview that they are in it to learn, and it is obvious that the eagerness to learn is out of commercial, not academic interest.
The telecom operators are not the only converging players from other traditional industries establishing a sound footprint in the possible future for financial services. While everyone talks about Apple Pay and Google Wallet, Starbucks is processing 7 million mobile transactions a week, representing 16 percent of all Starbucks transactions.
Since Starbucks is built on the existing stored value solution, the $4 billion worth of depositsin 2014 alone effectively makes Starbucks a savings bank with 13 million customers and without having to file for a banking license.
I have previously written how Alibaba consolidated all its financial services to a full-scale bank under the brand Ant Financial, showing the potential for large retailers to make the transition into banking and easily challenge both incumbents as well as disruptive fintech startups.
As the landscape for financial services changes, retail banking services are at risk of becoming commodities, and these services can just as well be offered by your local retailer or telecom operator.
When facing industry convergence, industry-centric strategic thinking has its obvious limitations, and most of our frameworks for strategy development in incumbent industries have been around since the seventies and eighties. But already back in 1978 Isaac Asimov wrote: It is change, continuing change, inevitable change that is the dominant factor in society today. No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.
In order to stay relevant in the future of financial services it is futile to look at traditional industry definitions. Conventional value chains will become obsolete, and new ecosystem will arise. The future belongs to those with the ability to think outside existing boundaries to stay ahead of the curve.
The landscape for financial services is changing, innovation is coming from outside the industry, and traditional banking is losing its relevance for the next generation of customers. This is backed up by the way-too-often quoted Millennial Disruption Index, which states that 71% of millennials would rather visit the dentist than the banks, 53% does not distinguish between incumbent banks, and 33% of the respondents do not see the need for banks at all. Accenture’s Banking 2020 report confirms this and draws a parallel to the challenges the telecom industry faced 20 years ago and states that non-banks will take a third of incumbent banks revenues by 2020. In this landscape, players that once were customers and partners can quickly become new digital competitors.
Large retailers and airlines are launching their own consumer banks and credit cards based on customer data, brand loyalty and capital reserves. The telecom industry is targeting the “underbanked” segments in developing countries through mobile banking. The media industry is developing proprietary payment solutions in order to secure valuable transaction data for targeted ads. In addition to this the investment activity in fintech reached $102 billion observed across a variety of investment types in 2014 ranging from seed funding in small tech startups to acquisitions by behemoths like Apple, Google and Facebook. A number of trends are behind these changes to the financial ecosystem.
Mobile applications make the bank and banking services available 24/7 in one’s pocket. Customers are already shifting from internet banking to mobile banking, and the next step is mobile payments and mobile wallets. Several companies are experimenting with personal biometrics through the built in gyroscope and GPS, and the mobile phone may act as a tracking device for both insurance and spending statistics. But this is still only touching the surface of the technical possibilities that lies within the use of smart devices in banking. With the rise of internet of things, your smart phone could easily become a central processing unit for your personal network of all your wearables and sensors. This creates unlimited possibilities for those who embrace the technology.
Big data analytics and machine learning enables automation of complex tasks. Challengers are utilizing visualization and big data in order to compete with incumbents. This is becoming clear in credit rating services where newcomers are using predictive analysis based on real time behavior to determine one’s credit worthiness. What is your purchase history? In what time of day did you conduct your purchase? Are you using correct capitalization when submitting forms online? What is your job description on LinkedIn? Who are your Facebook friends? All these metrics are potential variables that can be used in determining one’s credit rating.
Sharing economywith services like Airbnb offers homeowners insurance and host-protection insurance as an integrated part of the service. Both Uber and Lyft have expanded their liability insurance for ridesharing, and companies like TaskRabbit include an insurance policy covering property damage to make trusting strangers easier. You may ask yourself, when was the last time you really wanted to purchase travel insurance? Chances are you wanted to travel, and insurance was a necessity. Just imagine the implications for the auto insurance industry in a possible future of ridesharing in self-driving cars with integrated liability coverage.
Social medianeeds no further explanation, but for the financial industry the majority of social media services are implementing financial services as an integrated part of the platforms. Facbook has announced the launch of Facebook Pay. Snapchat launched Snapcash last year, and Kakao Talk in South Korea entered the mobile payment space through Kakaos own Payment platform, just to name a few. On the consumer side, the customers want to meet their needs in an easy way on their own premises. These are basically payments, lending and savings.
Payments are of little value itself, but are the main traffic source for banks and the basis for 80% of all customer interaction. For challengers payments are considered the bridgehead into financial services. These challengers have little to no interest in the transaction fees, but consider transaction data as the primary value object. Ownership and analysis of the information gathered through transactions is the new competitive advantage in the digital payment processing space, which makes loyalty and analytics is the growth driver for mobile payments. With the introduction of Directive on Payment Services (PSD) 2, the road is paved for new and innovative third party payment providers.
Lending is the primary source of income for most banks, and we are starting to see significant growth in the marketplace lending industry. Foundation Capital estimates the total value of this market to be 1 trillion USD by 2025, with recent IPOs by Lending Club with a valuation of $5,4 bn. Alternative lenders are currently disrupting both unsecured loans as well as small business loans, but companies like Social Finance have announced that they are aiming for the mortgage market in the long run. Marketplace lending is considered shadow banking for many, but it is closer to actual banking than we think. A closer look at lending Clubs loan process shows that the actual loan is issued by Webbank in Utah. Lending Club then buys this loan and places it in their balance. Lending club then issues a structured note and sells it to the investor. The lender pays Lending Club, and Lending club passes they payment forward to the investor. There is never a direct link between lender and investor, and lending club keeps it all in their balance sheet without having any capital risk.
Savings is also challenged by P2P-leding as this acts as an alternative investment class outside the banking world. In addition automated investment platforms with robot advisors based on intelligent algorithms and deep learning is replacing your traditional investment advisors. Wealthfront secured $70 million in growth capital to secure further growth after reaching $1 billion in assets under management since its launch in 2011.
Where yesterday’s customers went to the bank as a one-stop shop for all financial services, the customers of the future can choose from a wide range of financial services delivered from third-party solutions without ever needing to contact or log on to your bank. Google recently announced Google Mortgage, a comparison service for mortgages, and Cost per Click for loans are reaching up to 44 USD for one single click. This challenge the distribution model, as the customer journey for many financial services begins with a Google search.
The combination of these challenges creates a perfect storm for incumbent banks with numerous tech companies aiming to unbundle banking services. When facing fierce competition from the tech world banks still have a competitive advantage on the supply side through cost of funds tied to the banking license by being able to ‘create money’ in the process of lending. This is also the part of the value chain with most distance from the customers, and it is important to consider that regulations can be both a friend and foe for incumbents. Iceland recently announced a reform in the monetary system, where commercial banks should no longer be able to create credit. According to Marc Adreesen of Andreesen Horowitz, there are regulatory arbitrage opportunities every step of the way.
If the regulators are going to regulate banks, then you’ll have nonbank entities that spring up to do the things that banks can’t do. If we look to Iceland, the financial sector should be prepared for more changes the next twenty years than we have experienced the last hundred years.
To stay relevant, banks must embrace the technology-driven changes and look for new opportunities rather than protecting and preserving antiquated business models. After all, fortune favors the prepared mind.
Bankene står foran store endringer i årene som kommer, og siste tilskudd for å underbygge denne trenden er lanseringen av iPhone 6 og avdukingen av Apples mobile betalingsløsning. Apple har holdt tilbake på støtte for NFC-teknologi i tidligere modeller, men dette endrer seg med seneste tilskudd til iPhone-familien. I tillegg har Apple fått med seg betalingsgiganter som American Express, Mastercard og Visa med på laget i tillegg til kjeder som CVS og Walgreens. Med 800 millioner brukere som allerede har lagt inn sine kredittkortopplysninger i iTunes kan lanseringen av iPhone 6 potensielt fungere som katalysatoren som bringer mobil betaling til massemarkedet.
Apple er ikke alene om å utfordre den tradisjonelle finansbransjen. eBay har for lengst etablert en sterk posisjon gjennom Paypal. Google har forsøkt å posisjonere seg innen mobil betaling med den avviklede tjenesten Google Checkout og Google Wallet. Amazon sikter seg inn mot mobil betaling gjennom oppkjøpet av GoPago i tillegg til en annonsert lansering av enutfordrer til Square. Facebook på sin side sikter seg inn mot markedet for transaksjoner på tvers av landegrenser som alene har en markedsstørrelse på over 500 milliarder USD.
Dette bildet tydeliggjøres av Millennial Disruption Index som konkluderer med at generasjonen født 1980 -2000 anser banker som irrelevante og 73% av respondentene ønsker seg heller banktjenester fra aktører som Apple, Google, Amazon enn fra sin lokale bank. Accenture’s Banking 2020 rapport bekrefter dette, og trekker en parallell til de utfordringene telekombransjen stod overfor 20 år siden og sier at ikke-banker vil ta en tredjedel inntektene fra etablerte aktører innen 2020.
Der finansbransjen i dag opplever at barbarene står ved porten har mediebransjen allerede vært gjennom den smertefulle transformasjonen fra tradisjonelle trykte medier til digitale medier. Først fra papir til nett, og deretter fra nett til tablet/mobil. Resultatet av denne utviklingen er at de samme aktørene som nå truer finansbransjen har stukket av med deler av annonseomsetningen. Core Groups analyse av mediebransjen viser at omsetningsveksten for dags- og ukepresse har stått så godt som stille siden 2009, og driftsresultatet for dagspressen er halvert i perioden 2009 -2012. Samtidig vokser det totale reklamemarkedet og IRM anslår reklamemarkedet til å nå 20 milliarder NOK.
Der mediebransjen har vernet om sine tradisjonelle forretningsmodeller har aktører som Apple, Facebook og Google benyttet de mulighetene som de nye teknologiske plattformene åpner for til å bygge eierskap til kundene og samle inn enorme mengder kundedata. På bakgrunn av dette er det mulig å tilby spisset og mer kostnadseffektiv annonsering som kaprer markedsandeler fra etablerte aktører.
Et plausibelt scenario er at tilsvarende vil skje med betalingsformidling når Apple med flere strammer grepet om mobil betaling. Den store verdien knyttet til betaling i fremtiden er ikke nødvendigvis transaksjonsinntektene, men eierskap til kundegrensesnittet og analyse av all informasjonen som samles inn gjennom transaksjonen. Ifølge McKinsey består mer enn80% av kundens interaksjon med bankene gjennom betaling og eierskap til dette grensesnittet betyr eierskap til kundene.
For å lykkes med mobil betaling må bankene utnytte mulighetsrommet mobilen som plattformen gir utover kun selve transaksjonen. Ovum spår at analyse av kundeadferd og lojalitetsprogrammer vil være den primære driveren for mobile betalinger.
Starbucks er et av eksemplene på forretningspotensialet i å kombinere analyse, lojalitetsprogrammer og betalingstjenester og kan rapportere at mobile betalinger utgjør over 15 prosent av salget i USA i tredje kvartal i år.
En proteksjonistisk holdning i bransjer i stor endring har vist seg å føre til tapte markedsandeler og en svekket strategisk posisjon på sikt. For å lykkes i fremtiden må etablerte aktører gripe an de mulighetene som oppstår når ny teknologi introduseres og de tradisjonelle verdikjedene brytes. Alternativet er kostnadskutt og nedbemanninger for å verne opp utdaterte forretningsmodeller.
Et russisk ordtak sier: Den kloke lærer av andres feil, tosken bare av sine egne. La oss håpe at bankene tar lærdom av omveltningen som media- og telekombransjen har vært gjennom.
