By Paul Marcantonio, Head of UK & Western Europe, ECOMMPAY
Paul Marcantonio is Head of UK & Western Europe at ECOMMPAY, establishing the payment service provider as a trusted partner to e-Commerce merchants throughout the region. He has over 17 years of experience working within interactive technology and online commerce, driving success for various well-known brands across the diverse landscapes of digital payments and fintech.
Much has been said about the relationship between traditional banking institutions and the technological innovation taking place within the finance sector. The expectation is that outdated banking systems have and will continue to inspire new market players to engineer sophisticated solutions, thereby fueling progress. These developments then encroach on the market share traditionally belonging to banks, causing the latter to view fintech start-ups as direct competition. The reality, however, is much more complex. Banks and fintech start-ups can – and do – collaborate, with the former providing stability as the latter drives innovation.
The constancy of the banking tradition
Firmly entrenched as a staple of modern society, banking has roots stretching into history as far back as ancient Greece. Banking products and services, however, have adapted as consumer requirements changed. From the first credit voucher in 1880, the concept of credit cards proved popular. Though various alternative payment methods, including e-Wallets, bank transfers, e-Invoices, and more, have appeared over recent years, debit and credit cards issued by banks remain the most popular, occupying the majority of the payment systems market share.
When ECOMMPAY was established in 2012, the majority of our specialists were convinced that the market share belonging to payment cards would be much smaller in the near future. Though market changes have taken place over the past six years, the process has been slower than initially expected. In most regions and across multiple markets, credit and debit cards continue to enjoy greater popularity than their counterparts.
Innovation forging ahead
It would appear that the dominance of traditional banking institutions will not last forever. The financial landscape has become increasingly fragmented. Fintech projects across Europe, many of whom hold banking licenses, seek to address the payment challenges facing the modern consumer, forcing banks to confront their limitations. London-based Revolut, for example, issues pre-paid debit cards that offer interbank exchange rates, whereas Estonian-developed TransferWise established accounts around the world to facilitate international money transfers without the hidden fees.
The everchanging needs of the modern consumer
Acknowledging the changing consumer requirements, banks themselves have begun engaging with technological innovation, adapting to the current market conditions. Many have implemented programmes to generate ideas on how to modernise the banking institution, such as the Barclays Accelerator Powered by Techstars, which develop and engineer sophisticated new technologies.
Despite their attempts, however, fintech start-ups remain one step ahead. Focused on user experience and prioritising convenience, their ideas appeal to younger generations. The digital, mobile-only Monzo bank set records in 2015 for the speed of its crowdfunding campaign, raising £1 million in 96 seconds. The simplicity of Monzo’s mobile app has not only won the challenger bank a portion of the market share, it has forced traditional banks to revisit, rethink, and redesign their own systems.
Obstacles on the road to change
The challenge for fintech companies offering improved user experience and innovative solutions is the process of motivating consumers to change their habits. Though millions signed up to Monzo, how many have closed their primary account in favour of the challenger bank’s new current account? Traditional banks, it would appear, retain their hold on the market.
Fintech start-ups often make the mistake of attempting to compete on price. Though understandable, this strategy can inadvertently diminish their offering. Unless they’ve engineered a revolutionary system, such as the multiple international bank account established by TransferWise to conduct currency swaps at the local level, offering lower pricing without the necessary capabilities can lead to significant financial losses. The longstanding partnerships of established market players ensure extremely competitive prices, so attempting to go lower may result in bankruptcy.
Even if the fintech projects in question survive and achieve moderate market success, lower prices for customers can lead to a lack of resources for research and development. Start-ups confident in the value of their proposition should look instead to educate consumers on the tangible benefits they can offer.
Despite the competitive environment, the fintech projects capable of demonstrating to both clients and prospective partners the added value their innovative solutions and technologies provide to the financial sector will succeed and thrive. Their success then inspires increased, continued innovation on behalf of fintech peers and banking counterparts. Banks can no longer remain complacent, relying on tradition and customer loyalty.
The real threat
As demonstrated by the examples listed above, banks wishing to maintain their customer base must remain in tune with industry trends. Recognising the appeal of fintech start-ups, banking institutions have actively acquired successful projects to expand their portfolio of products and services, as well as to update their offering for the new digital generation.
Incubators and accelerators are already springing up in large numbers, funded by banks and big tech corporations, and this trend can only be expected to continue. We can already see leading international companies, such as Apple, Google, and Amazon, investing into financial technologies. It is these internet giants who have the financial resources, human capital, and consumer loyalty necessary to challenge banks on a global scale.
Owning a massive share of the international market across multiple industries, the aforementioned companies have earned the trust of billions, which has enabled them to smoothly enter the payments sphere. Each has launched its own alternative payment method. Amazon owns its own payment service, allowing customers to purchase goods both on their corporate website and pay for the services of third-party suppliers. The number of Apple Pay and Google Pay (formerly Android Pay) users grows daily.
Though these payment products can be considered complementary and therefore do not pose a threat to traditional banks at present, the internet giants responsible are likely to develop a more comprehensive service in the future. If this happens, it will be difficult for banks to compete on consumer trust, low prices, and technological innovation.
While banks and fintechs challenge each other, stimulating the creation of new technologies to meet consumer demands, they are not typically engaged in direct competition. The biggest threat to banks, as well as to fintech start-ups, is the internet giants capable of competing not only on price and scale, but also on investment into research and development. As the lucrative financial sector continues to attract new investors and market players, the resulting competitive environment inspires innovation and drives progress.
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