Following four consecutive years of decline, fintechs are finally coming of age, reaching both popularity and profitability, and in turn, traditional banks are fighting back with digital-only entities. That’s according to the recently released World FinTech Report 2021 from Capgemini and Efma.
Pandemic accelerates adoption of digital models
Fintechs have finally come of age it seems showing not just resilience during the pandemic, but acceleration of their adoption among consumers with verticals recording double-digit growth. The fintech sector reported 11% YoY deal activity growth in Q4 2020 after four years of decline, with the report tracking a 9% increase in deal activity in late-stage fintechs from 2019 to 2020.
The pandemic positioned fintechs to capture market share as consumers became increasingly digital especially during lockdowns, and as a consequence had made the traditional retail banking environment even more demanding.
According to Capgemini’s COVID-19 customer survey 2020, 25% of global consumers on the lookout for faster delivery, personalised services, and convenience say they would try banking products from challenger banks and next-gen fintech players.
Challenges facing banks in upping digital ante
But despite increasing acceptance of fintechs, consumers still continue to trust traditional banks with 68% stating they would try a digital-only offer operated by their primary bank.
However, while banks have many strengths including customer trust and global reach, weaknesses such as legacy IT and mindsets, business models and customer experience are hindering the digital-only bank journey with more than half (55%) struggling to address weak digital-only propositions.
But as fintechs continue to gain influence and market share, traditional banks need to evolve a hybrid model through behind-the-scenes modernisation of their middle- and back-office operations while creating multiple digital-only entities to serve specific customer segments.
According to Anirban Bose, CEO of Capgemini’s Financial Services, banks should look to the digital journeys of fintechs as a strategic imperative and those “capable of achieving long-term growth and profitability today will be tomorrow’s fintech-era success stories”.
Fintech-inspired digital journeys need to become crucial strategic paths for banks across the board, Bose adds. “However, players need to be sharp and specific as they move. There is no one-size-fits-all approach, and banks cannot create all digital subsidiaries equally."
Creating a seamless digital-only subsidiary
According to Capgemini, putting the user first is a top priority, and as the sector evolves, banks must cater to specific markets and meet consumer demand locally.
Emphasising that procrastination is no longer an option, Efma CEO John Berry says that for incumbents to remain relevant, “now is the time to embed finance within customer lifestyle and embrace platform-based models”.
Banks acknowledge the potential of seamless digital engagement with 63% of banking executives saying a digital-only subsidiary enables ubiquitous banking, 50% saying it drives new products to market faster, and 52% that it makes collaboration with the ecosystem easier taks to plug-and-play functionality.
The report outlines three approaches for the creation of a digital-only subsidiary and recommends a right-field foundation and drives long-term growth through an enabling culture. It further provides a four-stage approach for mature fintech firms seeking long0term growth and profitability.