World FinTech Report 2021: From disruption to profitability
Capgemini and Efma have just released their traditional World FinTech Report. The 2021 edition explores how successful FinTechs were able to breach the profitability barrier and navigate through the Covid-19 crisis. It also analyzes alternative options for banks to alleviate competitive threats by implementing digital-only subsidiaries with the “right-field” approach.
As explained in the report, FinTechs – who started rocking the industry after the 2008 global recession, with disruptive customer experience, low-to-no-cost products, simple onboarding, etc. – were able to defy vulnerability and demonstrate resilience during the Covid-19 crisis.
FinTech verticals (digital payments and savings, RegTechs, WealthTechs, etc.) tallied double-digit growth in transaction volumes as 2020’s black swan event posed sector-wide challenges related to operational performance and financial risk. Indeed, they actually witnessed average year-to-year growth of around 19%, according to the World Economic Forum, World Bank, and Center for Alternative Finance market assessment report.
Moreover, investor sentiment around FinTechs is maturing: over-the-top optimism for early-stage funding is weakening, while enthusiasm for late-stage, more established FinTechs is on the increase. “2021 is shaping up to be a busy year in the FinTech funding landscape. There is sustained interest among investors for big rounds and mature startups,” underlines Theodora Lau, founder of Unconventional Ventures. Also, the pandemic has strengthened VC interest because, in a crowded marketplace, B2B FinTechs were able to offer more stable and secure ROI during economic uncertainty in comparison to high-risk B2C startups.
The path to profitability
Seasoned FinTechs follow a four-step strategy for long-term profitability, according to industry executives interviewed during the production of the report:
- First, they advocate the diversification of offerings in order to build a profitable customer base. According to them, collaboration with third parties (financial and non-financial) enriches their value proposition and is a fast route to diversification. Also, FinTechs are able to leverage ecosystem banking to achieve the desired scale.
- Industry executives also tend to focus on the requirement of orchestrating an ecosystem or the joining of multiple ecosystems. Ecosystem banking thrives on creating and cultivating network effects, in which a large customer base attracts suppliers, and more suppliers attract more customers. And vice versa. Not all FinTechs have the resources and capabilities to actually orchestrate an ecosystem, but they can join multiple ecosystems to achieve profitable scale.
- FinTechs should pursue monetization opportunities by using a 360-degree approach. As explained by Matej Ftacnik, CXO of Vacuumlabs, “new entrants must look into innovative monetization strategies, such as through unorthodox partnerships and creating real customer value in areas adjacent to baseline financial services”. For instance, they can adopt multiple pricing models (ecosystem pricing, BaaS and partner pricing, data and advertising pricing, etc.) to boost revenue per customer.
- Finally, they should focus on expanding into new markets to maintain growth momentum. According to the experts interviewed, “geographical and market expansion is the next step as FinTechs scale and begin to break through even higher revenue per customer and sustained low-cost levels. Firms should explore new entry models, choose a situation-based alternative, and map out how to sustain a competitive advantage based on three essential pillars: cost dynamics, culture and evolving regulation”.
FinTech-inspired digital journeys are an overachieving priority for banks
FinTechs are now chasing profits and inevitably put intense pressure on incumbents. To stay relevant in the current FinTech era, the latter clearly need to leverage their strengths (first and foremost customer trust), while turning around weaknesses, such as customer experience. According to Capgemini’s Covid-19 customer survey dating back from 2020, close to 25% of customers are willing to try banking products from new-age partners, FinTechs and even BigTechs… “A benefit of being a digital bank backed by an incumbent is that it gives you the best of both worlds: one can extract the best aspects of the innovative FinTech’s startup ethos and combine it with the expertise and brand of an established bank”, highlights Marieke Flament, CEO of Mettle.
Increasingly aware of the benefits of digital banks, traditional firms are finally breaking free from old boundaries by adopting a mix and match of greenfield (creating a new independent entity from scratch, with no legacy code around it, to establish a digital-only subsidiary in a couple of years), brownfield (digitally mature incumbents with the internal capability to incubate a digital bank and to spin it off as a separate entity), and bluefield digital development approaches to create virtual subsidiaries and spin-offs. This latter approach falls between creating an iterative internal transformation program and building an independent digital entity.
The report also advocates the use of the following three-dimensional process to add structure to digital-only efforts:
- Define: Identify your targeted customer segment to zoom into your primary market and zoom out with distinctive solutions.
- Develop: Build the new entity on a modern core, with collaborative features and an enriched talent pool for long-term growth.
- Drive: Not all digital subsidiaries perform equally. Overcome stumbling blocks through leadership championing, ongoing financial support, and an enabled culture. Being digital comes with internal trade-offs. Banks therefore need to stay focused on long-term value and avoid short-term cannibalization.
“A bank of the future in the FinTech era will enable and nurture multiple digital-only subsidiaries, by providing support in terms of people, tech, and finance to serve different customer and community segments in different geographies”