Over the past few years, financial technology (FinTech) startups have taken Europe by storm. These startups are easing payment processes, reducing fraud, saving users’ money, promoting financial planning and ultimately, using technology to disrupt the existing financial services landscape. They’ve attracted a notable amount of interest from VCs and traditional financial institutions. By September 2015, the total investment in London FinTech startups alone, had already hit £357m ($554m), surpassing £314m ($487m) in 2014. These figures were boosted by several companies taking home multi-million-pound investments, with the value of the top 10 biggest deals of 2015 exceeding $400m.
A study conducted by the Wharton School of Business suggests that the reason for negative sentiments towards big banks relates to financial literacy – a lack of understanding of finance allows consumers to be easily taken advantage of, and thus, makes them cautious when approaching banks.
These negative feelings towards banks have persisted throughout history, and could perhaps be part of the reason why consumers are flocking towards FinTech companies. Services which FinTech companies provide, such as loans, savings advice, and financial assistance, infringe on the typical territory of big banks. FinTech therefore provides services that are not necessarily entrenched in the legacy of old financial institutions. Additionally, many earn their revenue from separate sources that are not considered exploitative or advantageous.
One example of this is the stock trading app Robin Hood, which allows users to trade stocks without transaction fees that typically come with trades made via traditional brokers. This illustrates how FinTech companies make profits without the need for traditional fees. In the case of RobinHood, it is the way in which the app reinvests money that brings increased revenue.
The introduction of modern technologies in finance has meant that new possibilities have opened up. FinTech startups have given people innovative and appealing new alternatives to traditional financial institutions, that those institutions can learn from.
FinTech providers have progressed more quickly than traditional banks allowing them to take advantage of innovative technologies, developing banking products that are more user-friendly, cheaper to deliver and optimised for today’s digital, mobile-first world. The majority of these startups have focussed on single-purpose solutions, designed to offer an improved experience with one product or service, rather than attempting to provide a wide range of different banking services. These players are small but agile, unencumbered by costly and inefficient legacy systems and less burdened by the demands of regulatory compliance. FinTech companies are built to innovate and have a clear advantage over traditional banks in this respect.
The growth of open data, APIs and cloud computing as well as intense cost pressures, are set to push these FinTech firms deeper into the heart of banking, fundamentally changing the infrastructure at the core of the industry. Some leading examples of this are banking innovations based on the Internet of Things (IoT), smart data, and distributed ledgers.
While FinTech companies could hold the upper hand when it comes to rapid innovation, banks can offer immediate scale and critical mass alongside technology and regulatory and technical expertise. Many banks have seized the opportunity for collaboration and have responded by starting their own FinTech accelerators or innovation labs, launching corporate venture arms, or partnering with FinTech firms.
What are the lessons traditional financial institutions can learn from FinTech startups?
Understanding the user’s pains and needs
When starting to tackle a complex problem, such as a financial service, it’s important to keep focus on the person who the solution is aimed at. This requires empathy, which means identifying or vicariously experiencing the emotions, thoughts and attitudes of another person. When you feel what the other person is feeling and you can mirror their expressions, opinions, and their hopes, then you begin to understand them. This is important, because this exercise will help you identify what they truly need, and the barriers they encounter towards getting to the solution. Empathy helps you create a product that will better serve the person you are targeting.
For example, TransferWise started by trying to solve the pain of transferring money in different currencies to different accounts. Traditional money transfer services such as Western Union and the Money Shop typically charge between 5-8% for transfers, as well as foreign exchange fees and all sorts of other hidden charges. Banks and brokers also tend to set foreign exchange rates that will earn them a profit. Hinrikus told London Loves Business in 2012 that he “regularly transferred money from my savings at home to my new account here. I found that I was losing five per cent of the money each time I moved it.”
By understanding the pain of the user transferring money using traditional services, Hinrikus and Käärmann were able to define an online system where people sending money abroad could swap it directly with each other, creating a peer-to-peer money transfer system. TransferWise charges a flat commission, and offers the mid-market currency rate with no markup. The company prides itself on transparency and fairness. In 2015, TransferWise announced that it has completed more than $1 billion (£650 million) worth of transactions in the US alone.
Focus on solving a single problem
A startup has limited resources, and therefore is likely to only be able to solve a single problem for the user. Both of the examples mentioned in this article, Robin Hood and TransferWise, each address just one challenge in financial services. Robin Hood focusses on the single function of investments, and TransferWise focusses on international money transfer. A lesson from both these companies is that their success comes from their focus on a single problem. Traditional financial institutions that are looking to update their existing offerings should consider tackling one service at a time.
Staged releases, get feedback quickly
The third lesson is that most FinTech startups use agile development methods, releasing small iterative improvements to their applications, proactively getting feedback from their users, and and creating products their users want.
Companies that operate on tight time scales and limited budgets need to be nimble, getting features and bug fixes released quickly. The general rule that “the smaller the release the smaller chance something goes wrong” is worth remembering. By isolating development into specific features, companies are able to reduce the amount of QA necessary and get improvements released. Furthermore, frequent releases with isolated changes make tracking down issues easier as developers have a much smaller set of changes to review.
With small and quick releases, getting feedback from the users promptly and frequently is possible. This is of course related to the earlier point of focussing on the user. User feedback can take various forms: user surveys, app data, and user reaction on social media, for example. Feedback helps companies – both startups and established businesses – learn and adapt quickly to their users needs.
At MOBGEN, we create products that focus on the needs of the end user, by delivering mobile platforms that strengthen the relationship between customers and brands or companies and employees. We aim to make mobile interaction easy, engaging and rewarding, so that users become loyal and lifelong brand-ambassadors. We do this by striking the right balance between strategy, creativity and technology.