While fintechs wave the flag of disruption and chant ‘financial inclusion for all’, the knights that promise to save the masses from the vagaries of traditional financial services have a more pressing agenda – profit.
Both nascent and established players in consumer-facing financial service industries are searching for the holy grail that delivers droves of highly engaged, loyal, and more importantly, active customers to their platforms. This is what investors want, and this is what fintechs need to secure funding.
Virtually every form of financial service has been disrupted; lending, payments, personal finance, international money transfers, consumer banking, investing and insurance. They have all been given a digital facelift.
Fintech's standout growth
Investors are bullish. According to a recent KPMG report, the growth of fintech investment is impressive: in 2018 global investment in fintech companies hit $111.8bn, with 2,196 deals being concluded.
But despite the market’s growth, and significant amount of money allocated to customer retention, the attrition rate is high. The ease of switching from one service to the next is a double-edged sword for the industry. It’s a crowded space and the competition is fierce.
Once the hype dies down around a new service, user engagement tends to drop off significantly. The email campaigns that clients saw as confirmation of the role they played in ‘sticking it to the man’ are soon relegated to the spam folder. Customer apathy is not in the fintech playbook and it’s the pimple on the nose of the industry that no-one wants to talk about.
Challenders' value proposition
The lofty claim of almost all financial services companies is to financially empower their clients. They also assume that everyone wants to build wealth and save money, but if you look at consumer behaviour, their real focus is on spending. Indeed, the biggest lament of Bitcoin diehards was the lack of ability to spend their coins.
Fintechs were quick to respond and now there are several players that provide a platform for crypto/fiat exchange: Wirex, Revolut and TenX are some of the companies that offer this service.
Broadly speaking, the value proposition of a challenger bank or crypto/fiat payment platform is savings on fees, ease of use, speed, the ability to monitor spending and an easy way to save money, and this fits with the financial empowerment agenda.
However – and this is the defining point of the argument – most people do not give much thought to long-term financial health: instead they care more about spending and instant gratification. The remittance arena is a notable exception, especially in emerging economies where moving money is expensive and logistically challenging.
Given that almost two billion people worldwide remain unbanked, companies such as WorldRemit, for example, have literally been lifesavers.
The founder, Dr Ismail Ahmed, launched WorldRemit off the back of his own frustrating and costly experiences of sending money to relatives in Somalia.
Cutting the cost of moving money and increasing accessibility is a key initiative of the World Bank – innovation in this space is well-received by governments and funders. For the rest of the fintechs, while in theory they are solving pain points such as saving and money management, they will have to negotiate the foibles of human nature.
In terms of consumer financial health, platforms that offer budgeting and savings tools have proliferated.
Challenger banks, retirement-saving platforms and budgeting tools enabled by ‘open banking’ are gaining popularity. Crypto-friendly payment companies encourage their users to ‘save’ crypto, and Wirex even offers rewards in Bitcoin.
The promise of a quick fix for our apathy towards saving and money management is appealing. However, there is nothing complicated about the process of achieving financial prosperity – earn, save, invest, protect your assets and spend wisely, it’s a basic formula. Yet we have a nation that is in financial crisis.
The middle-class consumer may switch to a challenger platform to potentially save a few pounds on services. But juxtapose this with the average 18- to 35-year-old budgeting £100-£150/week for entertainment - clearly saving is not at the top of the priority list.
The statistics are unsettling. Money Advice Service reported that almost one in three people in the UK have less than £1,500 in the bank, and 15 per cent of people have no savings at all. The average person saves under 4.4 per cent of their income. More than 300 judgments for bad debt are issued every day, and UK households are the second most indebted of the G8 nations. Retirement prospects are grim for most Britons – the average time spent in retirement is 19 years, but the average funding capability is seven years.
The UK, and indeed almost the entire globe, is facing a calamity of epic proportions – millions of people are entering their retirement years with little to no money. The GenX-ers and millennials who will take their place are potentially even worse-off because so many are severely in debt. Many people in the UK carry student debt into their 40s.
Encouraging people to save
While fintechs have solved many of the bugbears that consumers have with traditional financial services, they have neglected to address the biggest challenge of all. Humans are hardwired to pursue the quick fix - this means spending rather than saving.
Until we can confront and disrupt the core behaviour that sabotages an individual’s finances, fintechs will continue to be in a bun-fight for customer loyalty.
Without a massive intervention in terms of recalibrating consumer behaviour, the fintech community will be applying a sticking-plaster rather than a cure.
Real disruption will take place when we can shift the consumer mindset from over-spending and over indebtedness to saving and investing.
Iona Minton is part of the Crypto A.M. writers’ pool
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