On the origin of the FinTech Revolution: Why FinTechs need to think less like a bank and more like a Finch
Last week Accenture published a report questioning whether someone had ‘cancelled the FinTech Revolution’. It argues that evidence of declining VC investment, changing pricing strategies of front-running challengers such as Revolut, and limited customer uptake suggests that ‘death after proof of concept’ has become the norm and the FinTech Revolution has stalled.
FinTech, in this context, means any business proposition that aims to provide financial services by making use of software and modern technology and could, therefore, be a challenger bank that offers all banking services via mobile, for example Atom bank in the UK, or a specialist piece of software that changes the way a banking service operates in the back-end.
Mapa’s market analysis supports this argument. FinTechs have huge potential and there are certainly a large number of them on the market. However, barriers such as a lack of capital, a lack of customer trust and a perceived lack of added value have prevented them from fully realising this potential. Indeed (as the Accenture report also argues), one of the main problems seems to be that the amount of tech being used in FinTech is actually relatively limited. FinTechs have predominantly focused on providing a better customer experience than that offered by the incumbents but have done little to actually change the way that financial services are provided to customers. The issue with this is, whilst PSD2 could act as a catalyst for the success of FinTech (if success is defined in terms of customer numbers), it could also provide incumbents with a get-out-of-jail-free card as they will have the option to provide customers with this enhanced customer experience by using TPPs and APIs.
This could provide an alternative revenue stream to FinTechs, as they could effectively charge incumbents to use their platforms. However, it is here where my opinion differs to that of Accenture’s. The Accenture report believes that this should be seen as a supplementary revenue stream that newer market entrants could pursue in addition to their other services. In fact, it strongly stresses that diversification is going to be the key to success for these brands of the future. I believe that if FinTechs were to adopt this diversified approach they would run the risk of becoming Jacks of all trades, masters of none. Whilst it is often perceived negatively, there are advantages to being a one trick pony, or rather… a finch.
Most people have heard the story that Darwin’s seminal text on evolution ‘On the Origin of Species’ was largely influenced by the observations he made of the animal residents of the Galapagos Islands, most notably the finches. He noted that the finches on the islands all carried out largely the same function in the ecosystem but had huge variations in beak size and shape, and he concluded that it was their ability to develop these very specific adaptations that allowed them to fight off the competition and survive: Survival of the Fittest. Over time this has developed into the theory of the evolutionary niche, which basically shows that it is possible for many species of the same class to co-exist in the same environment if they don’t all try to do the exact same thing. In other words, they do one thing and they do it really well.
If you look at other industries that have undergone a technological revolution you will see where the innovators have successfully taken this principle on board and used it to their own competitive advantage. Spotify, for example, didn’t launch on the scene trying to offer music on tape cassette, vinyl, CDs, MP3s and streaming. It’s been enormously successful and the music industry has undergone a seismic shift, yet providers of music in all those other forms still exist because they exist within their own niche.
FinTech providers would do well then to adopt the same logic. They won’t succeed by trying to beat the banks at their own game but there are hundreds of unexplored niches in the financial services market. 2 billion adults in the world remain without a bank account, providers have barely even scratched the surface of the FinTech as platform and/or service opportunity, and even within the banked community there are a multitude of customer segments. It is simply not possible to provide a successful solution that capitalises on all of these possibilities and so, to thrive, FinTechs should pay attention to the environmental factors that matter the most to them and find the niche that these provide and do it so well that customers (be they retail, SME, corporate or incumbent provider) simply cannot ignore them.