Accessibility and simplicity: the key to the sector
A new financial ecosystem is emerging in the world where traditional financial institutions, fintech companies and new players from other economic sectors must coexist.
Origin and advantages of Fintech
Fintech arises from an acronym for finance and technology. The concept brings together a large number of companies that offer traditional conventional banking products but use the Internet as a distribution channel.
Fintechs have an important technological base and, through the use of this technology, allow financial services to be available to customers in a more accessible and simple way. From the large number of products and services offered by fintechs, four are currently the most significant: Payments and Transactions, Personal Financial Management, Investment Consultancy and Marketing, and Alternative Financing Platforms between investors and companies (Equity Crowdfunding, Crowdlending, etc.).
Traditional financial institutions believe that the Fintech phenomenon could risk 23% of their current businessin the next five years.
This loss would initially affect retail banking, means of payment,asset and wealth management services. However, the expected downward pressure on margins and profitability of the business is much more significant.
Due to low interest rates and excess liquidity, the situation may have a major impact on many financial institutions that have not yet fully recovered from the last economic crisis.
By 2020, more than 60% of customers in the traditional financial sector will access services via mobile applications at least once a month.
The customer-financial institution relationship has traditionally been based on the bank branch as a communication channel and on employees as personal advisors to customers. The current penetration of mobile devices and development of related financial applications is leading to the emergence of a new communication channel that is simple, immediate and available 24 hours a day.
How will this affect the traditional channel? Will there be a shortage of bank branches? Does it make sense to maintain current staffing levels?Should employees be refocused on more value-added work? The answer to these questions will in many cases mean a complete rethink of the strategy of many financial institutions.
Only 32% of the financial institutions surveyed had some kind of agreement with fintechs in 2016, whereas25% acknowledged having no relationship at all.
The current development of fintechs is perceived by traditional financial institutions as a threat to their business. But, why not turn this threat into an opportunity to transform and differentiate themselves? In terms of efficiency, this type of company can bring strategic opportunities and improvement to traditional financial institutions.
The lack of innovation, an endemic evil in the financial sector (technological changes have often been purely cosmetic) is being replaced by re-engineering processes, the real lack of competence, which led to unsatisfactory customer service, is history and the customer is finally being placed at the centre of the business.
Entities are making significant efforts to properly segment their customers in order to make each one feel “special”, which will result in customer loyalty and the generation of greater added value.
We are therefore facing the emergence of a new financial ecosystem, in which traditional financial institutions, new fintechs and even players from other sectors (Amazon, Google, Facebook, etc.) must coexist. The position finally occupied by each of the participants will be directly related to the success of the strategy adopted.
Alternative financing in this new context
The report by KPMG and the University of Cambridge provides some insights into this:
- The total volume of the online alternative finance market in Europe in 2015 (latest published figure) amounted to €5,431 billion, 92% more than the previous year.
- The UK accounts for 80% of the total market, which also has 40% of the total number of platforms.
- With the exception of the UK, in the rest of Europe the predominant alternative financing models were Peer-to-Peer Consumer Lending (market volume € 366 M), Peer-to-Peer Business Lending (€ 212 M) and Equity Crowdfunding (€ 159 M).
- Spain ranks behind all segments except Donation Crowdfunding and Real Estate, however, it is far behind the overall figures of the rest of the countries. The total amount of investment financed by Crowdfunding in 2015 amounted to €50 million, far behind the leader in Continental Europe, France, whose investment amounted to €319 million.
In conclusion, it can be said that alternative financing should become increasingly important in the new financial ecosystem that is developing, consolidating itself as a valid option for both individuals and companies.
In Spain, the market is still in a very early stage with very low business figures. Although annual growth is high, the significant bankarisation of the Spanish financial system, the need to establish legislation in line with the rest of the countries in our environment and, why not, the lower financial education of the population, act as brakes to the development of alternative financing in Spain. However, the provisional figures that are becoming known for 2016 make one quite optimistic, with a development of Equity Crowdfunding and Crowdlending that it is understood to begin to be considered for many companies as a fully viable alternative financing.
In this process of growth and consolidation of alternative financing in Spain, Fellow Funders wants to play an important role. To do so, we will have to know how to adequately convey to the market what their differentiating factors are and what added value they provide to both companies and investors. These are their challenges.