The startup story is beginning to reach fever pitch with a number of areas displaying substantial potential. While e-commerce has now become a household term and the food delivery and wellness spaces are really heating up, one area that has gained considerable traction is FinTech.
FinTech is the emerging financial services ecosystem enabled by digital technology. The sector is seeing tremendous growth with considerable interest from venture capitalists and other investors. Global investments in the sector nearly tripled last year, growing from about $4 billion in 2013 to over $12 billion in 2014. With some FinTech firms seeing successful IPOs, and a growing number with over $1 billion valuations, there is strong evidence of investors
taking this space seriously.
Strategies of successful FinTech startups
So, what are successful FinTech startups doing that is getting investors— and FS incumbents alike—to sit up and take notice:
a) Innovative business models: FinTech companies today encompass the entire spectrum of financial services, from banking, insurance and investment distribution platforms, to analytics-backed credit management services, to innovative lending, funding and payment solutions. These companies are using innovative business models that lower costs and improve customer experience:
P2P lending: Peer-to-peer (P2P) lending has transformed the lending model and has opened up the sector to a wider borrower base with its perceived lower interest rates and smooth customer experience. P2P platforms do not lend out their own funds but connect borrowers with interested investors. Revenues are earned through origination fees charged to borrowers and margins on interest earned by investors, apart from additional charges and fees. These platforms leverage analytics to go beyond traditional underwriting rules and make holistic judgements on borrower credit capability. With the minimal infrastructure requirements of an online business, P2P platforms have greater pricing flexibility, providing lenders with high return opportunities.
Payments: Technological innovation is radically changing the way payments are made in India and changing the expectations of consumers and service providers alike. Companies are developing systems that change customer behaviour in ways that benefit both parties (like Uber—automate payments without the need to ‘pay’). Retailers are leveraging social media popularity to let customers pay through Tweets or Facebook posts. NFC technologies enable secure transactions through smartphones by merely bringing them in proximity with POS devices. Such innovations not only improve customer experience but also promote channel usage.
b) Digital technologies provide superior service delivery: By leveraging digital technologies that are popular amongst millennials—or digital natives as they are also referred to—FinTech companies are able to deliver financial services to their core consumers. With the millennials broadly making up one of the largest generations to date, it makes sense to track the specific ways in which they manage their money. For instance, crowdfunding sites are piggy-backing on social networks to increase popularity and scope. Some payment solutions allow money transfers directly through text messages.
c) Quick, clean and relevant user friendly experiences: User experience is of particular importance during sign-up and on-boarding. Given that regulations generally require financial services firms to capture sensitive customer information, creating a trust-worthy first impression goes a long way. Good designs can reduce
the complexity behind making financial decisions by providing transparency of costs and charges, while still
re-enforcing and convincing consumers that their choices are the right ones. Other UX facets, such as tracking user journeys and harnessing analytics to curate experiences, having design consistency across platforms to ensure continuity of experiences, or fewer steps to completing transactions could go a long way in increasing customer stickiness.
With the potential disruptions of the FinTech wave on the FS fabric, traditional players will need to consider their strategy and be aware of the different FinTech threats and their possible business impact. PwC has developed a platform, which addresses this concern. The platform has been designed to provide companies with the information they need to monitor and understand how technological innovations may impact their businesses. Some of the strategies that could arise out of the information from the platform:
a) Compete: Traditional players could compete with startups by adopting similar business models and technology approaches to service delivery. The key would be to either show additional benefit from existing product offerings or to match up to the service standards of the FinTech competitors. Either way, swift go-to-market implementation is a must, especially given the ability for FinTech start-ups to scale and grow.
b) Collaborate: Financial institutions may consider collaborating with some successful startups. Collaborations could either be in the form of investments in the startups or through partnerships. Such collaborations could have synergistic benefits for the incumbent both in terms of joint product development and additional distribution channels, as well as in terms of faster acquisition of innovative technologies and business models.
What the future holds
With such encouraging trends, the financial services space is at an interesting position. The more established FinTech companies will need to be able to wade through regulatory requirements while simultaneously trying to expand operations without losing momentum. Traditional players will need to develop quick turn-around go-to-market propositions in order to compete and evolve their business models as the industry re-shapes itself. The key to differentiating and winning in this space will be through the effective use of digital
technologies to maintain operational efficiency while providing a superior customer experience.
By Vivek Belgavi & Avneesh Singh Narang
Vivek is partner & FS technology leader; Avneesh is senior consultant— technology consulting at PwC India