Fintech is disrupting and reshaping the entire financial sector as funding is booming and fintech companies are posing an increasing threat to traditional banks.
2021 was record-breaking in fintech investment, said McKinsey LEAP Expert Associate Partner Pep Viladomat at a panel discussion titled ‘Disrupted by Fintech’ at the Mobile World Congress Barcelona (MWC22).
According to Viladomat, the following patterns are emerging:
1. Funding is booming
Fintechs are scaling up, especially through mega-funding rounds and acquisitions.
2. Refined value propositions for fintech scale-ups
Some companies are struggling to be profitable. With more pressure from investors, they need to redefine their value propositions and product offerings to build a path to profitability.
3. Fintech’s increasing threats to banks
As digitalized financial services are being adopted with accelerating speed, fintechs, and especially big techs, pose real threats to banks. Banks should decide how they compete in the future. At the same time, there is an enormous overlap as many clients use both traditional banks and fintechs.
4. Regulation shifts are igniting innovation
Regulators are actively shaping the digital banking landscape and opening opportunities for further innovations in the industry, such as Open Finance and crypto-assets.
Maturing fintech ecosystem
The fintech ecosystem is maturing as investments are increasingly flowing into later-stage companies. There is scaling across Europe, said Alexander Prot, co-founder and CEO of Qonto, a financial solutions provider for businesses. The question now is how to be one of the regional winners.
He sees more vertical integration, too. If you are targeting consumers or businesses, you have to offer them as many services as possible. Some companies try to build a super-app by themselves, while others seek to find partners and combine different services.
“The role of fintechs is to push banks further,” Prot said. The big fundamental difference between a fintech and a bank is that banks can take deposits and deposits are guaranteed by the government. "I don’t expect that to change."
“We raised a large round in January because we are not profitable yet,” Prot said. “Our growth is attractive for the investors, they are happy to invest in such a business model. But of course, we have to be profitable at some point.” Qonto aims to be profitable in two years from now, that is seven years after its launch. The company has raised €622 million since it was founded. It has over 500 employees in four European countries, including France, Italy, Spain and Germany.
The valuation of fintechs is skyrocketing, Alexander Dunaev, COO and co-founder of Barcelona-based fintech company ID Finance said. You can not always compare a fintech and an established bank with lots of assets. Banks still have the resources and the critical mass of users. On the other hand, fintechs have seamless execution, small structures and it is difficult for a bank to compete with that.
He cited the example of Tesla and traditional carmakers. “It is not about what you are right now but what you will be.” We don’t have to see fintech as a competition against banks. There is a lot of collaboration in the field of AI, machine learning and identity regulation.
Now let’s see the example of a neobank and a traditional bank.
N26 - Future Bank Experience
"Our journey has been rewarding but challenging since N26 was set up in 2013 in Berlin," said Maximilian Tayenthal, co-founder and co-CEO of N26.
One of the main challenges is that the war for talent is getting increasingly difficult. N26 can’t find enough people to tackle all the projects. In Barcelona, they have a team of 140 people and 50 open positions. N26 has altogether 1,000 open positions they want to fill in the next two years. When it comes to compensation, they find it hard to compete with later-stage companies. Early-stage companies can make up for that with the right packages. They offer the flexibility of work and they moved to a remote-first environment. People can work from other cities or even from other countries.
Regulation is another issue. “We started as a technology company and on the way we were becoming one of the fastest-growing banks in Europe and definitely the fastest-growing bank in Germany. The expectations and the scrutiny of the regulators have also increased over time. It is hard to maintain the mindset of a fast-growing flexible startup in this highly regulated banking environment.”
It is easier than ever to raise funds for fintech, according to Tayenthal. Investors know that fintech is one of the few fields that has not yet been fully disrupted by new technologies and new players. It is still an area that offers big opportunities. Financial services is the area most ripe for disruption.
In banking, the trends are really long-term. The transition to online banking and mobile banking is happening much slower than in other areas, such as travel, music, or videos. He also sees consolidation in fintech. There will be players like N26, which are rebuilding all these services, including accounts, trading, lending, insurance and crypto.
Fraud is a huge threat in the entire industry, where they have seen a massive spike during the pandemic. N26 is using smart technology solutions to fight fraud and considers fraud prevention one of the most important tasks.
N26 wants to launch crypto later this year as it is the most demanded product of their customers. The second one is trading.
Tech’s impact on traditional banks - CaixaBank
Jose Ignacio Goirigolzarri, chairman of CaixaBank, was talking about technology’s impact on the financial sector, especially on established banks. CaixaBank serves 20 million customers and has a market share of 25-30% in Spain.
1. Impact of digitalization on distribution models
Habits and distribution models are changing in banking. However, changing customer habits are not homogenous; some clients want only digital relationships with their bank, others prefer to maintain a face-to-face relationship. This requires continuous adjustments in the contribution models as well as investments.
2. Entry of new players
Digitalization lowered the barrier to entry in the banking sector. As a result, new players are emerging who want to disrupt the status quo. Regulation plays a key role in ensuring a level playing field, he said, referring to the emergence of unregulated digital currencies. The sooner regulators start dealing with this the better, as regulatory arbitrage is a source of instability for the system as a whole.
The banking sector must respond to the new players with humility and ambition. Humility because the newcomers are developing some excellent practices. With ambition, too, because traditional banks are making a huge effort to adapt, for example by investing in digital channels. They have strengths that can be leveraged against such competition, such as their close relationship with customers that is based on trust. The barriers between sectors are becoming blurred.
3. Relevance of digital ethics
The massive use of data often results in companies ignoring the fact that data, especially personal data, must be protected. Users are often unaware of how their data is used, processed, managed and sold. Analyzing data means that we can make predictions about users’ personal characteristics such as typical behavior and personality. Assumptions can be made about users without them being aware of it. This potentially leads to discrimination based on race, social status and gender.
The automated use of algorithms without any human supervision can generate biases that result in unfair situations. Organizations that consume and generate data must follow strict ethical principles, placing the customers as data owners.
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