List of Figures
List of Abbrevations
1 Introduction
1.1 A changing industry
1.2 Purpose of this thesis
1.3 Methodology
1.4 Structure
2 Innovation in the retail banking industry
2.1 Innovation and change in customer behavior
2.2 Trends in banking
3 Fintechs
3.1 General Information
3.2 Business to Consumer (B2C) market
3.2.1 Mobile Payment
3.2.2 Lending
3.2.3 Funding
3.2.4 Personal Finance and Wealth Management
3.3 Business to Business (B2B) market
3.3.1 Software-as-a-Service (SaaS)
4 Banks response strategies
4.1 Copycat
4.2 Collaborate
4.3 Investment and Acquisition
4.4 Internal Innovation
5 Discussion
5.1 Climax and shakeout
5.2 Consequences for Fintechs
5.3 Consequences for banks
5.4 Consequences for the customer .
6 Recommendations
7 Conclusion
Bibliography
Appendix
Figure 1 Global FinTech Financing Activity, adapted from Skan, Dickerson & Masood, (2015)
Abbildung in dieser Leseprobe nicht enthalten
Since the beginning of the 21st century and the spread of the internet whole industries have been transformed or became obsolete.
Disruption in the form of digitalization has taken place in the music, book, media and movie industry. Online and mobile services, offered by start-ups and technology companies are changing one industry at a time. Retail-focused companies like Apple, Netflix, Google, Amazon and Twitter have changed the way people think and use music, films, books and media. They also changed the consumers’ general perception of good service, usability and of how companies are doing business.
Despite all these improvements in our everyday life, the financial retail banking industry has remained relatively constant, even though it caused people to adapt to new circumstances, in the form of the Global Financial Crisis (GFC), resulting in a Global Recession and higher regulations for the industry. At that time, people trusted the financial industry less than the energy or chemical sector, in fact, no industry earned less trust (The Financial Brand, 2012). Since then, the industry missed the opportunity to regain the customers’ trust by changing their habits and improving their services. Instead, customers are increasingly unlikely to buy products or refer their bank but are increasingly prepared to leave their bank within the next six months (Capgemini; Efma, 2015).
This state of stagnancy inside the financial retail banking industry seems to have changed. New entrants have caused uproar in the industry. Fintechs, an acronym for financial technology, are entering the retail market, forcing banks to adapt and innovate. Online and mobile banking services are now considered to be the future of financial retail banking. Fintechs threaten to take away customers by offering better and cheaper services with higher usability. Not a day goes by on which Fintechs are not being discussed in the press, while banks mostly account for negative headlines (Dowideit & de la Motte, 2016). The new entrants provide financial services through internet-based modern technologies in various segments of the industry, or simply create new segments like Crowdfunding (Mollick, 2014). As both the number of Fintechs and their customers increase, banks realize that Fintechs are going to be a threat for them.
“Banking is necessary, banks are not”, the famous quote by Kovacevich (Foster, Gupta & Palmer, 1999), which is often attributed to Bill Gates, seems to achieve an entirely new meaning.
The thesis focuses on how Fintechs are disrupting the financial retail banking industry and how banks react to these changes. In this context, challenges and opportunities of their actions will be analyzed and discussed.
Furthermore, it will be derived how aspects of innovation influence the Fintechs success in this process and how innovation takes place in the financial industry in general.
Finally, this thesis discusses the implications of the current situation for both Fintechs and banks, and identifies potential outcomes and consequences for all involved parties.
In order to gain information about the evolving financial market, a literature research was conducted in both newspapers and scientific studies about this topic. Information and evidence about the digitalization in general and the disruption in the financial industry through Fintechs in particular could be obtained from studies from consulting companies like Accenture, Boston Consulting Group and Ernst & Young (EY) but also from financial institutions like ING-Diba and Deutsche Bank. Information on Fintechs has been gathered on industry specific websites, magazines and on their personal websites. Relevant theories on innovation will be identified through a scientific literature review.
To obtain first hand information about how banks review the current situation, a questionnaire has been conducted and send to the 20 biggest retail banks in Germany via Email. Two telephone interviews had been conducted with representatives of banks that have been willing to talk about their opinions and actions. As information about company intern processes and strategies, related to the future, are mostly confidential, banks have been inclined to only give general information, which is why literature and reports have also been used to evaluate and analyze the banks’ actions.
The thesis itself is divided into the introduction to the topic followed by four main parts of the thesis and a summarizing conclusion.
Chapter 2 discusses how innovation takes place and will provide information about current trends in the financial retail banking industry.
Chapter 3 illustrates what Fintechs are and what services they offer, both for consumers and banks. As this thesis is conducted in Germany it focuses on the situation in Europe and Germany as much as it is possible. Major innovation has been made in America and Great Britain; however it will provide examples of German Fintechs if possible and otherwise use international ones in order to highlight important innovations, services and trends.
Chapter 4 points out the banks possibilities to react to Fintechs and the disrupted industry. Current strategies, identified through the questionnaire, will be discussed and explained based on the behavior of several German banks. Opportunities and limitations of the banks actions will be derived methodologically.
In chapter 5, implications for the financial industry as a whole, and for banks, Fintechs and customers in particular, will be derived. Consequences for every party involved arise out of the interconnectedness of their actions. Finally, in chapter 6, recommendations for banks will be made on how to approach the business in future, based on previous findings and current strategies.
This thesis ends with a conclusion on the topic and highlights opportunities for further research concerning factors that can possibly influence the innovativeness in the retail banking industry.
In order to evaluate how Fintechs disrupt the retail banking industry it first needs to be defined how innovation takes place in general and how it affected consumer behavior, leading to changes in the retail banking industry and new trends in banking.
Joseph Schumpeter identified innovation in his famous book “History of Economic Analysis” written in 1912 as the critical point for economic change and later derived the concept of “creative destruction”. An old structure is hereby destroyed while a new one takes its place, representing the “...essential fact about capitalism” (Schumpeter, 1934).
According to Schumpeter innovation can be defined as (1) the introduction of a new good, (2) the introduction of an improved or better method of production, (3) the opening of a new market, (4) the conquest of a new source of supply of raw materials or halfmanufactured goods, and (5) the carrying out of the better organization of any industry (Schumpeter, 1934).
An idea, service or product is called an innovation if it is perceived to be new by the adopter (Zaltman, Duncan and Holbek 1973) although the degree of innovativeness can differ. Differentiation can be made between radical innovations that clearly differ from existing practice (Duchesneau, Cohn and Dutton 1979) and incremental innovation, ones that show less improvement in practice and/ or simply adjust old practices to current technology (Munson and Pelz 1979). Frame and White (2004) define financial innovation as an innovation that either allows cost reduction or an improvement of service.
Innovation in the form of enhanced technologies, permanent connection to the internet and all its features have become implicitness in our everyday life. The digitalization has changed the dimensions of innovation by increasing generatively and pace. New products can now be created by parties that have been not been involved before and the diffusion of innovation is increasing (Yoo, Lyytinen, Thummadi & Weiss 2010).
More importantly for the retail banking industry, digitalization created a new understanding of being a customer, as people change their behavior due to a psychological impact and the process of diffusion. Consumers now expect and demand products and services that not only fulfill their needs but have high usability and are made by customer-centered companies (King, 2010). Retail banking customers demand enhanced online and mobile services, as they have experienced firsthand how how much their lifestyle has improved through other industries like television and shopping. This changed their perception about retail banking. Worldwide, banking customers of the Millennial Generation, people born in the 1980s and 1990s (Twenge, Freeman & Campbell, 2012), have lower customer satisfaction levels than customers of older ages, which shows that they have higher expectations of the banks services as well (Capgemini; Efma 2015).
Retail banking can be defined as a mass market inside the banking industry that consists of standardized, high volume products (Horn, 2009). Digitalization and the rise of mobile and stationary internet have had an impact on how retail customers interact with their bank and how they expect financial services to be. The use of cheques is strongly declining as other forms of payment offer more advantages for the customer (Silva, Ramalho & Vieira, 2015) and branches already lost importance in the past (Devlin, 1995).
Instead, online banking is the new, conventional form of banking. 54% (Bundesverband deutscher Banken, 2014) of the population of Germany uses online banking, which is little compared to Northern European Countries which range from 82% in Sweden up to 89% in Norway and 91% in Iceland (Eurostat, 2015). Common activities include checking ones balance or transactions and receiving alerts from the bank (Board of Governors of the Federal Reserve System, 2015).
The Federeral Reserve (FED) defines mobile banking as “using a mobile phone to access your bank or credit union account.” (Board of Governors of the Federal Reserve System, 2015). The main reason for using mobile banking is convenience, as you can do banking wherever you are, and are not bound to a branch or your computer. In Germany, 47% of the population is using mobile banking; another 17% are planning on using it in the next 12 months (ING-DiBa, 2015b). Customers that use mobile banking have a higher Net Promoter Score (NPS) than customers that do not use mobile devices, showing that they are more loyal (Baxter & Vater, 2014).
However, there are still multiple reasons for many people to not use mobile banking. According to the FED the most stated reason is that the customers’ banking needs are being met without the use of mobile banking followed by security concerns, a too small screen and general mistrust in technology. 20% even state that it is too difficult to use mobile banking (Board of Governors of the Federal Reserve System, 2015).
The fact that some people do not see any additional benefit in mobile and online banking outlines that traditional services are not being seen as innovative just because they are offered in a new medium. As Schumpeter outlined, innovation can particularly be created by providing new services or opening new markets (Schumpeter 1934). This is what several Fintechs are focusing on doing, offering new or enhanced services in a new medium.
Overall, consumers got accustomed to innovative services in other industries, due to globalization and digitalization, and demand the same level of service in the financial retail banking industry from banks. Customers are not likely to change back into their old habits and compromise on their wishes as younger generations are growing up in an even more connected world than the generation of “Digital Natives”. As they are not satisfied with banks and their solutions, Fintechs seized the opportunity and entered the market.
The Economist Intelligence Unit (2015) defines Fintechs as “… new entrants that use Internet-based and mobile technologies to create new or superior banking products (p.2). Fintech firms range from start-ups to the bank product offerings of large tech firms like Google or Apple or PayPal.”.
This definition shows that Fintechs do not have to be necessarily startups, although most people assume a Fintech to be a small and new company. This is due to the reason that Fintechs are enjoying the reputation of being usability and technology driven, just as startups are. Their digital services require no branches but rely on the internet instead. Their advantages in their business include lower costs, more intuitive services and quick pivots in case of mistakes because of their small size. (McKinsey, 2015) The Fintech environment is less regulated than the financial banking industry and still under development (Arner, Barberis & Buckley 2015). Similar to non-banks, Fintechs have no urgent requirements on equity, liquidity or due diligence and are not under the supervision of regulatory authorities like Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and ECB. (Hackethal, Inderest, 2015).
The global investment in Fintechs has tripled from $4.05bn in 2013 to $12.2bn in 2014, which symbolizes a strong growth of 201%, compared to an average growth of 63% in overall venture-capital (Accenture, 2015). As Figure 1 shows, Fintechs are experiencing a dramatic increase in Venture Capital (VC) funding, most of which is made in the US. However Europe and especially London are on the rise. Not only the amount of investment, but also their total number is increasing. According to McKinsey, there exist over 12.000 Fintechs worldwide (McKinsey, 20015).
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Figure 1 Global FinTech Financing Activity. Adapted from Skan, Dickerson & Masood, (2015) Copyright (2015) by Accenture
The retail banking industry can be divided into different services and segments, like lending, wealth management or payment. Although Fintechs are being seen as generally disruptive by the media, not every company aims to revolutionize the whole industry. While some invent and offer new services, the majority is focusing on facilitating one single aspect of the retail banking industry (The Economist Intelligence Unit, 2015). Each Fintech hereby chooses one segment which it wants to enter with one specific solution (Cuesta et al., 2015). They all have in common that they are trying to appear younger and more transparent in conducting their business than banks.
In the “Landscaping UK Fintech Report”, commissioned by UK Trade & Investment and conducted by EY (2014), Fintechs have been defined either as Facilitators or Disruptors, with Facilitators being Fintechs that facilitate services and support the financial industry and Disruptors, companies that account for disintermediation with their innovative services (p.2). It can be seen that Facilitators account for incremental innovation while Disruptors account for radical innovation.
The following sections will provide further insights on how Fintechs are disrupting the financial retail banking industry in the business and consumer market.
The Business-to-customer (B2C) segment can be defined as the business between a company and a consumer, the end-user of the company’s products or services (Ivestopedia n.d.). B2C is the market that is most recognized by the media, as changes in services can be observed immediately and are relevant for the consumer.
Typically the B2C market is affected by higher competition and more but smaller buying units (Circle Research, n.d.). The B2C market of the financial retail banking industry consists of every aspect in which a consumer or customer interacts with money, e.g. payment, lending, funding, transactions and investing. This thesis focuses on the most promising segments, consumer finance, payments, lending and wealth management, which recently experienced the most significant disruption through Fintechs. McKinsey estimates that 15% to 40% of revenue can be taken away from banks by Fintechs until 2025 in these segments (McKinsey, 2015).
Mobile Payment can be defined as any payment made by using a mobile phone, including but not limited to purchases, bill payments, charitable donations or payments to another person (Board of Governors of the Federal Reserve System, 2015). Transactions can be made via text message (SMS), through an Application (App) like a mobile wallet, by accessing the account through a web page, Near Field Communication (NFC) Chips or any other possible solution.
Payment in general is a critical process. In the best case the consumer should not experience any difficulties, time constraints or interruptions; as these could lead to a cancellation of the purchase. Therefore payment should be as easy and quick as possible.
The advantage of mobile payment compared to payment via credit card is clear: The consumer is able to pay with their Smartphone at offline point-of-sales and does not need a credit card. Research by Kim et al (2015) concluded that not mobility itself is the principal reason to use mobile payment services. Instead acceptance of mobile payment is driven by usefulness and the ease of use. A swift registration and a convenient user experience hereby are the most significant factors for acceptance.
The mobile payment systems currently most known by consumers are mobile wallets. Using NFC (Near Field Communication) technology they enable customers to store their personal financial information like credit, debit and gift cards on the users mobile device. Google Wallet, introduced in 2013 and Apple Pay, introduced in 2014 are the most wellknown wallets on the market. It can be seen that network externalities are extremely important for the success of mobile payment (Au & Kauffmann 2008). At the moment, there are many different solutions and no trend can be derived on one single winning solution (Braun et al., 2014). On the whole, mobile payment is expected to be the future of payment, as it offers advantages for both, consumer and retailer (Au & Kauffmann 2008).
Traditionally financial institutions like banks or credit card companies act as providers of loans. They grant individuals or organizations a loan as a debt with an interest rate. The loan can be secured or unsecured. Common personal loans are mortgage or car loans that differ in their interest rate according to the borrower’s credit score.
Fintechs in the lending segment have chosen a different approach by providing platforms on which borrowers can represent themselves and give information on how much money they need and what for. The platform specifies the credit worthiness of the borrower and the interest rate differs depending on the riskiness of the investment. The Fintech itself is not necessarily the lender but gives its user the opportunity to be the lender. Typically many lenders give small amounts of money to one borrower and decide based on the information given on the website whom they want to lend their money. This can be referred to as crowd lending. The Startups hereby facilitate the lending process by erasing the bank as an intermediary. At the same time the company does not face the default risk of a loan, revenues are generated by commission fees from borrower and lender. An example is the Fintech Lendico that provides such Peer-to-Peer lending (Lendico, n.d.).
Additionally, the Fintechs are making use of big data to refine their scoring system and provide loans themselves. One example is Kreditech. The Hamburg-based company was founded in 2012, has recently raised €82.5m in its Series C round and is currently valued with €190m (Lunden, 2015). Kreditech has reportedly two million customers in nine countries with €120m issued in credits. The company calculates the user’s credit score by using big data and learning algorithms. It uses 20.000 Data points, including social media, financial transactions or how long the user has read the terms and conditions for his loan (Kreditech n.d). The system evaluates how much of your Facebook friends went to university and how creditworthy they are. It checks your latest Google search and confirms your place of residence by using tagged twitter photos (Seibel 2015b).
The funding segment has received high media attention with the introduction of crowdfunding, a new form of funding, offered by Fintechs.
Crowdfunding is defined as the funding of a project or venture by a large amount of people, whereby each individual contributes a relatively small amount. This is usually done via the Internet (Oxforddictionaries.com, n.d.a). The project, created on platforms like Kickstarter, Companisto or Seedmatch, needs to be funded within a certain time frame; otherwise the invested capital is returned to the funders, the so-called backers of the project. Once the project is fully funded the owner receives access to the capital.
Crowdfunding offers customers the new possibility to directly invest in a product or project and at the same time enables small businesses and startups to get access to equity. Banks that traditionally accounted for funding are often unwilling to finance young companies as they are risky and cannot provide a proof of concept. Crowdfunding allows testing this proof of concept right away. If enough people are backing a product and are willing to pay upfront, this not only proofs that there is a market, but also the company gains its first customers, receives media attention and obtains a better position for a second round of funding.
Customers on the other hand get much more information about their investment and are free to decide if they want to back for instance a social, ecological or technical project and what they want to receive as a reward. Depending on the project this could be a product, interest or company shares.
This system overpasses the lending policies of banks by funding only projects that customers believe in as the investors are typically the first buyers and users of the product. As a result the Crowdfunding industry is booming and likely to account for more funding than VCs in 2016, with Crowdfunding and VC funding already on the same level in 2015 (Barnett, 2015).
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