An Analysis of Fintech Startups and Banks by McKinsey 1

Are fintech startups going to eat the banks breakfast? There is unprecedented coverage around fintech (financial-technology) startups and the gauntlet they have thrown down to the banks. Sometimes it is hard to make sense of it all. The fintech startups clearly offer something unique and banks recognise that the world around us is changing and they need to adapt if they want to continue to be a part of it. With this backdrop, McKinsey published an article Cutting through the noise around financial technology in which they take a step back from the “noise” and summarise the current financial-technology landscape. Following are the notes i made as i read through the McKinsey article.

Banking on the Past..?

McKinsey describe how historically banks have been heavily protected by building “robust businesses with multiple moats”. Banks have built these multiple moats through their:

• Expertise in complex financial products
• Highly regulated institutions
• Role in ensuring a strong economy
• Trust that customers have in the banks brand
• Access to the major clearing systems
• History – many banks have been around for a couple of hundred years – they must be doing something right…
  • McKinsey describe how during the last dot-com boom there were 450 attackers, today only a handful of these survive

Fintech Startups – This Time Its Different

McKinsey analysis shows how and why the growth and interest in fintech startups is different:

• Fintech startups have grown from around 800 in April 2015 to over 2000 today, and payments is where the majority of these firms are at!
• Venture Capital (VC) investment in fintech companies grew to the tune of $12.2 billion in 2014
• Following on from the 2008 financial crisis, trust in the traditional banks has been lost
• Mobile phones, particularly smartphones, have turned traditional banking on its head
• Data is now enabling a new kind of personal service
• The cloud, and the significant decrease in the cost of computing power
• Millennials and the thing that is important about these guys is that they are digital natives
• Customers demands are changing and they are now looking for personalised, seamless and on-demand services

Fintech Startups Must….

• Identify how to establish and grow their customer numbers in a cost effective way
  • McKinsey hint at partnerships by citing how Paypal during the dot-com boom was able to reduce their cost of customer acquisition by 80% by partnering with eBay
• Recognise the benefits of not having any or very few physical distribution costs, and pass on the time/cost advantages to their customers
• Utilise big data and data analytics to better understand their customers and deliver customised products and services to them
• Cherry pick products and services that they can potentially offer
  • McKinsey suggest products and services aimed at millennials, small businesses and the unbanked-underbanked populations are key focus areas
• Engage in strategic “coopetition” (cooperative-competition) by utilising the existing banking infrastructure
  • McKinsey give the example of how Apple Pay provides a frictionless payments experience by partnering with existing banks
• Be aware of their regulatory environment and manage risks in the products and services they choose to offer

Banks Must….

The key message that McKinsey put across is that banks should not look at individual fintech startups, instead they should consider what these fintech companies represent – and as a result ensure that they build/buy the necessary capabilities.

• Utilise customer data (within the bank and outside of it – using 3rd party APIs) to understand their customers and offer customer focused services and products
• Offer a unique customer experience – enabling real time, across various channels, personalised products and services to their customers
• Create a digital marketing strategy – competitors are no longer just the traditional banks, now there are various non-bank competitors who use digital media and content marketing to win over customers and provide them with an improved experience
• Get rid of their legacy systems and implement end to end digital systems that operate in real time, can capture and interrogate data, and most importantly implement systems that are agile and can adapt to changing demands in a short time frame
• Adapt to the changing world:
  • Customers are demanding mobile services – the “mobile first strategy” is what banks should be thinking
  • Customer data and the banks own systems and processes should be protected from any cyber-security threats
  • Keep up with technology changes and use new software development principles
  • Utilise new processing and storage platforms that are cheaper and faster
• Review and redesign their organisational structure and culture so that it support the above listed changes