Thursday 9 July 2020 3:36 pm Apater Capital Talk

Financial services sector banks on a digital future

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City A.M. contributor

“We know you enjoy a little trip into town, but you can do your banking online these days…”: a typical multi-generational conversation as a growing number of people turn to online tools to help with their finances.

Inevitably it’s not been a smooth journey. Many find comfort in the familiarity of a bricks-and-mortar bank branch and the sense of security this imbues. But times and attitudes are changing. Younger people are often more comfortable than older generations at using digital means for both everyday banking and exploring the increasing number of financial services smart-phone apps. Lockdown has accelerated this, with established banks pushing yet more firmly on their prompting to stay away from high-street branches.

This should be – and is – a terrific opportunity for the financial technology (‘fintech’) sector to win customers and credibility. A webinar convened today by communications agency Brands2Life took up precisely this theme: has a ‘tipping point’ has been reached for the creation of long-term trust in financial services and fintech?

UK leadership amid ‘trust’ challenges

The question is important for UK Plc, which is seen as a worldwide leader in fintech and championing ‘open banking’, the global trend facilitating the industry.

City AM reported earlier this year that British fintech companies attracted a record £37.4bn of investment in 2019, up 91 per cent from the previous year.

Digital-only banking brands such as Monzo and Revolut have gained significant traction, particularly among a younger demographic; and a growing number of apps – at time of writing, 75 – are available on an ‘app store’ recently launched by the UK’s Open Banking Implementation Entity.
But consumer-confidence challenges jolted into prominence during the past fortnight as the reverberations of the scandal at Germany-headquartered company, Wirecard, hit the UK. The Financial Conduct Authority stepped in to instruct the company’s UK operation to cease all regulated activities after its parent operation had disclosed a €1.9bn black hole in its accounts. After a panicked weekend for customers, the FCA ban was lifted. But there is concern about the reputational damage on fintechs in general, both from a consumer and investor perspective.

“This will affect trust because when one part of the ecosystem has a failure, for whatever reason, there’s a trickle-down effect,” said Pinar Ozcan, professor of entrepreneurship and innovation at Oxford University’s Saïd Business School, during the webinar.

Moving more quickly on the fintech journey 

The investment challenge is also growing because of coronavirus’s impact. Analysis on the current economics of the often venture capital-backed fintech market is mounting up. Newer companies, inevitably, are seen as particularly vulnerable.

But nonetheless, companies talk of a speeding-up of their fintech journey. As digital financial services companies seek customers, credibility and funding, established brands continue to evolve their own propositions towards digital delivery and engagement.

Vicki Harris, chief commercial officer at Kensington Mortgages, said the firm, which partners various fintechs, had been “moving quicker in respect of what partnerships we want to develop” during the pandemic. “We had been very open to working with fintechs before this [pandemic] happened, and are even more so now,” she said. 

Targeting millennials? Try an emoji

In terms of consumer take-up, it’s not easy to get people on board, with many hesitant about sharing their personal financial data by digital means and with newer market entrants.

“We have seen a massive acceleration in the use of digital processes over the past three months and hopefully that will lead to more people being willing to use digital services,” said Harris. “I think the pandemic will accelerate that. But certain segments of the population are not going to do that overnight.”

Beyond attracting new customers, newer banks’ greatest hurdle is, Ozcan said, that they are seen by users as a secondary account, with fundamental payments (such as salaries) continuing to run into a ‘main’ account with an established high-street bank.

“Some are clearly targeting millennials, speaking back [with customers] in emojis – very new-age – whereas others are very much trying to be a traditional, serious bank to get [customers] to completely switch over,” said Ozcan.

Twists and turns await. But the direction of travel remains in fintech’s favour.