World Fintech Report 2021
Some highlights on Capegemini Reaserch Institute’s findings.
The subject of Fintech is one of the most important topics in the economy of today. In addition to the innovation it brings to the use of money, it is disrupting the current existing state of affairs in the banking industry.
Towards the 13th anniversary of the Great Recession’s end, the Capgemi Research Institute has published its World FinTech Report 2021, which examines the next maturation milestones of FinTech toward profitability and globalization. I have summarized its key findings in the following paragraphs.
The banks of the future will support those that are underbanked, will support those that are environmentally and socially responsible, and will encourage digital subsidiaries.
The 2008 global recession gave rise to the emergence of FinTechs, which became consumer favorites, resulting in a radical change in the banking industry.
In the year 2020, despite a black swan environment, FinTech segments such as digital payments, digital savings, and WealthTech segments continued to grow.
The growth of the FinTech sector was challenged by downtime of the platform, high numbers of failed transactions and an increase in the cost of payroll, onboarding, and storage.
Even though total funding in Q4 2020 stayed the same, FinTechs reported a 11% growth YoY after four consecutive quarters of declines.
It is anticipated that there will be more big rounds of funding in 2021 as well as a larger amount of crowdfunding coming from retail investors.
FinTechs which have mature product portfolios and sustainable business models are supported by investors rather than SMEs with unbundled products which are funded by early-stage investors.
The reason B2B FinTechs are more profitable than B2C FinTechs is that their cost per unit profit is higher compared to their cost to acquire the unit (unit economics).
The pandemic is strengthening VC interest in B2B FinTech startups due to high-risk B2C startups being overshadowed by B2B FinTech startups.
Typically, B2C FinTechs provide as-a-service capabilities to incumbents, and can make profits through offering their services to retailers, non-financial companies, and other FinTech firms.
Fast growth strategies and creation of early moneymakers were a hallmark of the global FinTech evolution, leading to regulations, supervision, and a balance between fast growth and sustainability.
Based on a comparison of incumbent and challenger banks, incumbents pay a higher acquisition cost per customer, while challengers pay less.
To be successful, FinTechs build viable products and expand their product offerings within their original market(s).
Retail banking FinTech companies offer consumers free or nominally priced banking services.
Financial technology firms bundle several products and services, and rebundle several financial products and services to offer their customers a broader range of financial services. In B2B FinTech, partnerships are being created and go-to-market strategies are being developed.
In the future, new-age banking companies may offer banking and financial services beyond traditional banking.
Ecosystem banking allows FinTechs to reduce customer acquisition costs, reduce customer churn, and identify monetization opportunities.
When FinTech companies reach their breakeven point and have sustained low costs per customer and high revenues following their exploration of new entry modes, they opt out and develop a variety of situational options.
A robust model of growth is being adopted by Neobanks, rival banks and challenger banks, which emphasize monetizing their capabilities rather than raising excessive capital.
FinTechs are always faced with the dilemma of balancing the development of their technology in-house and outsourced. To succeed in entering a new market, FinTech companies must be sensitive to the local culture and have a diverse workforce.
Having a geographic expansion strategy is crucial for maintaining growth momentum while maintaining a firm’s targeted user type. As a FinTech company, maintaining growth momentum is critical for the development of a hybrid IT model for a hybrid IT model.
Throughout the past few years, FinTechs, new-age players, and BigTechs have been putting pressure on incumbents in the banking industry.
In the midst of the current health crisis, more than three-fourths of respondents said they trust traditional banks.
The unit economics of a customer’s account can be a great tool to generate revenue from an account that is beyond the financial services spectrum.
To become a part of the lives of your customers, you can offer banking capabilities as a service.
With COVID-19, banking has become more demanding. As a result, financial institutions are adopting platform-based and customer-centric business models to remain competitive.
As a result of the pandemic, incumbent banks now realize the importance of adopting a seamless digital engagement model.
Within the last decade, several traditional banks have built digital-only subsidiaries. Although subsidiaries help businesses stay afloat, not all of them are successful eventually.
It is possible for digitally mature banks with unproven skills in digital product innovation to choose to build their independent digital entity.
To ensure a long-term profit potential for their digital-only subsidiary, banks should begin talks about establishing that entity and consider it a complementary entity.
It may seem obvious, but even though many banks overlook it, there are some questions about the customer that need to be asked.
Parent banks can use their digital-only subsidiary’s core to build one or use their core to build one.
Goldman Sachs launched a digital-only debt-management service in 2016 called Marcus, which offers users unsecured loans, savings accounts, and the option to change loan parameters without incurring additional fees.
Having implemented the modern core, banks should quickly migrate to the cloud and free up their back-offices to focus on innovative activities.
It is possible to create new revenue streams by collaborating with scaleups, as well as improving internal processes. Additionally, collaboration can be used to embed banking functions into the offerings of both financial service providers and non-financial service providers.
By collaborating, digital-only banks can create user communities, organically grow their customer base, and expand into new markets. Having a partnership with a non-Financial Services provider can help to reduce the costs associated with acquiring new customers.
In the financial services industry, there is a shortage of talent, especially technology professionals, and recruitment and retention of new talent is a problem.
Those banks that are successful in building a talent pool of talent combine existing employees with external hires to add new insight and fresh perspectives to the department.
Banks need to balance between building in-house solutions and outsourcing. FinTechs solve problems that banks do not.
Because of existing business models and legacy mindsets, incumbent banks often stumble when it comes to addressing these hurdles.
By partnering with a technology partner and offering full parent support, incumbents can create successful digital-only subsidiaries.
The digital-only subsidiary of a company must target a clearly-defined niche, a new geographical market, a new product or service line, or a customer microsegment, like the shed economy.
It is of paramount importance for a digital-bank to receive four to five years of support from the parent, which would include marketing assistance, marketing funding, and guidance around compliance and acquisition, and a willingness to accept strategic cannibalization on the part of the parent bank.
Employees of digital banks should not be hired from their parent banks. For the digital bank to take off from the backbone to the next level, there must be a continuous evolution of the minimum viable product.
To run a new digital subsidiary successfully, you must maintain commitment from the top.
To reduce their carbon footprint, customers want banks to use paperless processes, renewable energy, and biodegradable cards, while banks have committed to reducing their carbon footprint by 80% by 2050.
The incumbents have had little success partnering with ESG providers to develop green products, and the emerging green FinTechs are far ahead.
By 2019, 80% of global data will be unstructured, and data is needed to build sustainable financial products and services.
In addition, digital-only subsidiaries have minimal carbon footprints, and can incorporate novel technologies (such as artificial intelligence) and collaborate with third parties in developing ESG-centric green and sustainable value propositions.
Digital channels are becoming a dominant mode of interaction for banks, and banks are increasingly putting customers first. There is, however, a pressure on existing banks coming from new players, both within and outside the banking sector.
Hub-and-spoke banking is a model that offers the opportunity to serve many markets while at the same time keeping a core infrastructure of banks.
Digital banks are designed to leverage the expertise and resources of the parent bank to target different customer segments and regions.
In the past, executive management had placed significant emphasis on the need to provide individualized banking experiences to customers located in far-flung locations.
New players in the financial services industry are constantly innovating about relevance and competitive advantage. Using new-age technologies, Frog, a design and innovation firm, helps FinTechs stand out in a crowded field.
Niche market challenges can be addressed by developing business models, testing them, and finding the best innovation partners.
