The number of young companies offering financial services of all kinds is now estimated at around 5,000 worldwide – three years ago it was only 2,000. These FinTechs in the banking sector and InsureTechs in the insurance sector usually specialize in very specific lucrative subsectors such as credit card business or motor vehicle policies.
“With this strategy, they attack the classic financial service providers exactly at the point where they are still making money,“ says Andreas Sommer, Value Stream Leader Financial Services at ERNI Schweiz AG. As a result, their existing business models were functioning less and less. From 2017 to 2019 the proportion of consumers worldwide, who are already taking advantage of challengers‘ offers – according to a recent study, almost doubled from 33 to 64 percent.
Particularly the Chinese and Indians are most open to the new banking services – in each case 87% already use them. In Russia and South Africa, the use of these services is also very pronounced, with 82% each. The French (35%) and Japanese (34%) are at the bottom of the league. The Swiss and Germans are in the middle range with 64 %.
Destruction of proven business models
According to a forecast, the FinTechs, for example, are expected to tap into around 14% of the revenues of traditional banks in global payment transactions by 2025. “In the insurance industry, the situation is similar; here, too, new providers are driving the disruption forward,“ adds Patrick Wilhelm, Principal Consultant Global Services Lead Innovation & Digital Business Consulting at ERNI Switzerland AG. Whereas the digital attackers of the first phase usually only offered simply structured and quickly arranged products such as liability and household insurance, they are now increasingly pushing into the automobile and health insurance market. “If we think of self-driving cars, which will probably cause fewer accidents, this will reduce the need for insurance policies covering all aspects of the vehicle, but will be much more individual,“ Wilhelm expects. New specialized competitors could possibly meet these needs better than traditional all-round providers.
Driving your own digital change forward
Not all founders with clever business ideas are value vampires and disruptively destroy the business of established providers. Some also complement other businesses and are therefore very suitable for cooperations. “In order to effectively counter the attacks of the new competition, it is important that financial institutions and insurance companies themselves focus more on the customer and drive their own digital change,“ the two consultants also recommend as an effective antidote. But this kind of approach has not yet been enthusiastically received everywhere. Some established companies are still hesitant to open up to new business models – but “the pressure will increase“. Many banks and insurance companies also lack the will to change and the willingness to deal with new things. That is the biggest challenge. Analysts predict that the industry will experience significant changes in the future and “a perfect storm of market forces“. Why? They see the reasons for the tough competition primarily in rising operating costs, a changing risky landscape and a flood of new technologies, but especially also in changing customer expectations. Patrick Wilhelm and Andreas Sommer also agree with this. “Since today‘s customers are now often on the move with their digital devices, they expect advice and answers around the clock, seven days a week,“ they know from experience. But consumers also appreciate personal contact – “ just not behind bulletproof glass“ – but where it can be easily integrated into their everyday lives.
New opportunities through platform economy
However, dangers for the established financial sector do not only lurk from the young challengers. According to the current “World Retail Banking Report 2019”, 75 percent of the more technically savvy customers are already using at least one financial product that comes from a so-called BigTech such as Apple, Google, Amazon or Facebook. More than 80 percent of consumers, who are likely to change their bank this year, are already processing payments through these neobanks, using their card offers and bank accounts, or will do so in the next three years.
In some countries this is also facilitated by the new EU Payment Services Directive (PSD2). Since last year, it has required banks in this economic area to provide third parties with secure access to their systems, for example to view account data and initiate payments. This enables financial service providers from outside the industry to create digital platforms on which both their own products and those of external service providers can be used to offer a comprehensive range of services. Patrick Wilhelm is convinced that “This enables them to retain customers more successfully”. However, the legally required interfaces, which must be provided by the institutions, only allow for limited innovation. The key to success therefore lies in even stronger collaboration: Banks and insurance companies enable newcomers to access their broad customer base and use their innovative services, apps and applications to do so. A win-win situation for all parties involved. In doing so, they go beyond the requirements of the PSD2 directive and take a big step towards Open Banking. The prerequisite for this, however, is that the solutions of both sides are compatible with each other.
Taking unusual paths
In the financial world, the ecosystems, that are widely propagated in this context, will not emerge overnight. However, if innovative strength is developed and growing partner networks are established, the established players will also have greater opportunities to further consolidate their still existing position of trust and to survive in the long term in a highly competitive financial services business. “But this requires the will to change and the willingness to take unusual paths,” says Patrick Wilhelm. As an example from the insurance industry, he cites the Swiss insurance company “Die Mobiliar”, which focuses on “living and mobility” and participates in a platform where advertisements for apartments and vehicles are placed. In this way, it is possible to early identify what motivates customers and what they expect from an insurance company.