Traditional banks are challenged by fintechs, but they are not on the defensive as much as some superficial reading of the terrain might suggest. A new report from Capgemini charts the marketplace.

The term “fintech” has sprouted in recent years, and technology-driven financial organisations are often said to be challenging banks’ turf, but so far they aren’t putting traditional players into the defensive as some of the noise might suggest, a study finds. 

A survey by Capgemini and Efma of 33 markets around the world finds that while consumers increasingly accept fintechs, they continue to trust traditional banks, and 68 per cent say they would try a digital-only offering operated by their primary bank.

That said, the disruption caused by COVID-19 and the way the pandemic has accelerated the use of digital technology, has meant that incumbent banks and other organisations are under pressure from fintechs. These and other findings come from the World FinTech Report 2021.

The study finds the fintech sector in broadly strong health. However, more than half (51 per cent) of fintechs expect that their capital reserves will be affected because costs related to staffing, onboarding, and data storage have surged during the pandemic lockdowns. 

Even though conditions have been volatile, fintechs reported 11 per cent year-on-year deal activity growth in the final three months of 2020, after four straight years of decline.

“Fintechs with a diverse product portfolio are winning investor backing, too. As they’ve matured, fintechs have proved to be competent competitors and partners; and the report tracked a 9 per cent increase in deal activity in late-stage fintechs from 2019 to 2020.”

“Global adoption of digital models during the pandemic also positioned fintechs to capture market share while sparking sector competition and turning up the heat on incumbent banks. Twenty-five per cent of global consumers on the lookout for faster delivery, personalised services, and convenience say they would try banking products from new-age players,” the study said.

Approaches
The Capgemini report outlines three approaches – “Greenfield”, “Bluefield”, and “Brownfield” − for incumbents creating a digital-only subsidiary, recommending an approach that defines how to grow such businesses.

The report said that “legacy mind-sets” and business models hinder the digital-only bank journey – including a lack of long-term parent support (47 per cent), unwillingness to support short-term strategic cannibalisation of the parent firm customer base (43 per cent), and more than half (55 per cent) struggling to address weak digital-only propositions. 

“Fintech-inspired digital journeys need to become crucial strategic paths for banks across the board. However, players need to be sharp and specific as they move,” Anirban Bose, CEO of Capgemini’s Financial Services, said.

Banks said they know that digital capabilities are important for winning and pleasing clients. Of the banking executives surveyed, 63 per cent said a digital-only subsidiary enables ubiquitous banking, 50 per cent said it drives new products to market faster, and 52 per cent said it makes collaboration with the ecosystem easier, thanks to plug-and-play functionality.

The study draws on insights from three primary sources - the Global Retail Banking Voice of the Customer survey 2021, the Retail Banking and FinTech Executive surveys and interviews 2021, and the World FinTech Report 2021 Executive Steering Committee consisting of executives representing banks, fintechs, technology partners, VCs, and business enablers, across the globe. These primary research sources cover insights from 33 markets: Australia, Belgium, Bhutan, Brazil, Cambodia, Canada, China, Denmark, France, Germany, Hong Kong, Iceland, India, Italy, Japan, Malaysia, Mexico, Mongolia, Myanmar, the Netherlands, Norway, Portugal, Russia, Saudi Arabia, Serbia, Singapore, South Korea, Spain, Sweden, Switzerland, the UAE, the UK and the US.