As Global Fintech Adoption Grows, Traditional Banks Pursue Digital Transformation Strategies: Report

As Fintech companies become a lot more profitable, traditional banks are trying to counter their business strategy with branded digital-only subsidiaries.

Fintech firms are getting ready to approach their next “maturity milestone” – profitability – as they showed great resilience during the COVID outbreak, with verticals registering double-digit growth despite industry-wide operational and financial challenges.

Responding to Fintech firms and businesses’ rising popularity among consumers and “close proximity” to profits, incumbents have been establishing digital-only entities in order to appeal to “specific customer segments,” according to the World FinTech Report 2021 from Capgemini and Efma.

As noted in a release shared with Crowdfund Insider, over 51% of Fintechs expect their capital reserves to be significantly impacted as costs for staffing, onboarding, and data storage surged considerably during pandemic lockdowns.

Despite the volatile environment, the Fintech industry experienced 11% YoY deal activity growth in Q4 2020, after four straight years of decline. Fintech firms with a “diverse” product portfolio are “winning investor backing” as well. As they’ve been maturing, Fintechs have “proven to be competent competitors and partners; and the report tracked a 9% increase in deal activity in late-stage Fintechs from 2019 to 2020.”

The report also noted:

“Global adoption of digital models during the pandemic also positioned FinTechs to capture market share while sparking sector competition and turning up the heat on incumbent banks. Twenty-five percent of global consumers on the lookout for faster delivery, personalized services, and convenience say they would try banking products from new-age players.”

Although consumers increasingly accept Fintech solutions, they also continue to “trust” traditional banking institutions, and 68% said they may try an all-digital offering operated by their primary bank. But many years of operational “patches” and “intertwined” legacy tech and business models present transformation challenges for incumbents, the report noted while adding that COVID-19 aftershocks have shown that postponing action is “no longer an option.”

Anirban Bose, CEO of Capgemini’s Financial Services and Member of the Group Executive Board, stated:

“FinTech-inspired digital journeys need to become crucial strategic paths for banks across the board. However, players need to be sharp and specific as they move. There is no one-size-fits-all approach, and banks cannot create all digital subsidiaries equally. Players capable of achieving long-term growth and profitability today will be tomorrow’s FinTech-era success stories.”

The announcement from Capgemini also mentioned that incumbents are getting ready to take advantage of their strengths (for example, their global reach and customer trust) while “addressing their weaknesses (legacy IT and customer experience) to remain relevant into the future.” The report also noted that “putting the user first is a top priority, and as the sector evolves, banks need to cater to specific markets and meet consumer demand locally.”

The release from Capgemini added:

“Banks acknowledge the potential of seamless digital engagement. Of the banking executives surveyed, 63% said a digital-only subsidiary enables ubiquitous banking, 50% said it drives new products to market faster, and 52% said it makes collaboration easier thanks to plug-and-play functionality.”

The release also mentioned:

“The report outlines three approaches − Greenfield, Bluefield, and Brownfield − for incumbents creating a digital-only subsidiary and recommends a right-field methodology that defines a vision, develops a robust foundation, and drives long-term growth through an enabling culture.”

But the legacy “mindsets” and business models may hinder or prevent the all-digital bank journey – including “a lack of long-term parent support (47%), unwillingness to support short-term strategic cannibalization of the parent firm customer base (43%), and more than half (55%) struggling to address weak digital-only propositions,” the report added.

The report further noted:

“As FinTechs continue to gain influence and market share, traditional banks must evolve a hybrid model through behind-the-scenes modernization of their middle- and back-office operations while creating multiple digital-only entities to serve specific customer segments.”

Efma CEO John Berry remarked:

“Pandemic fallout has made the traditional retail banking environment even more demanding. For incumbents to remain relevant, now is the time to embed finance within customer lifestyle and embrace platform-based models − procrastination is no longer an option.”

Capgemini’s report also offers a four-stage approach for “mature” Fintech companies looking for long-term growth and profitability. Phases include “product diversification to attract a broader customer base, ecosystem orchestration to create new strengths, monetization of services, capabilities, or data − and expansion into new markets.”

The release added:

“Beyond the market competition impetus, incumbents are also experiencing mounting societal and regulatory pressure to shift toward green and sustainable practices. According to the Global Retail Banking Voice of the Customer survey 2021, 65%  of consumers globally want banks to reduce their carbon footprint by following paperless processes, consuming renewable energy, and offering biodegradable cards. Nearly a third of consumers would pay an additional charge for green products and services – or shift to a new provider for environmentally and socially friendly products. By their very nature, digital-only banks are well placed to support sustainable finance – with paperless processes and zero branch networks.”

The World FinTech Report 2021 from Emfa and Capgemini draws on key insights from three primary sources – the Global Retail Banking Voice of the Customer survey 2021, the Retail Banking and FinTech Executive surveys and interviews 2021, and the World FinTech Report 2021 Executive Steering Committee “consisting of executives representing banks, FinTechs, technology partners, VCs, and business enablers, across the globe.”

These primary research sources cover insights “from 33 markets: Australia, Belgium, Bhutan, Brazil, Cambodia, Canada, China, Denmark, France, Germany, Hong Kong, Iceland, India, Italy, Japan, Malaysia, Mexico, Mongolia, Myanmar, the Netherlands, Norway, Portugal, Russia, Saudi Arabia, Serbia, Singapore, South Korea, Spain, Sweden, Switzerland, UAE, the United Kingdom, and the United States.”

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