How fintech startups score points with smart technology and customer focus

Rapid growth of the fintech sector

Fintech startups have impressed with breathtaking growth rates in recent years. According to a study by the Federal Ministry of Finance, the market volume of the German fintech segments of financing and wealth management will develop from around 3 billion euros in 2015 to an estimated 80 billion euros in 2020. At the end of 2019, the fintech sector in Germany already counted over 900 companies. And when it comes to financing, the sector is also on the upswing. Venture capitalists pumped more than a billion euros into fintech startups in both 2018 and 2019.

Fintechs offer personalization and flexibility

Many bank customers, whether private individuals or commercial customers, have been dissatisfied with the services provided by their bank or savings bank for years. In particular, the so-called digital customer experience, i.e. the customer experience for the services offered on the web, often leads to great dissatisfaction. In addition, customers often feel that they are not receiving personalized offers from their credit institution.

According to a study by management consultancy EUROGROUP Consulting (EGC), one particularly critical and dissatisfied customer group is the youngest target group, the so-called Generation Z or digital natives. This group of customers is particularly frustrated by the small range of products and services that their traditional bank generally offers them. Many younger customers therefore have a great tendency to switch from their house bank to a fintech. Fintechs offer them convenient and quick execution of their financial transactions via app and transparent price-performance ratios.

Banks and fintechs — cooperation or confrontation?

Traditional financial service providers can no longer ignore fintechs with a shrug. Startups in the financial services sector have now become too numerous and too professional. While many banks reacted with foreclosure and competitive thinking in the early stages of fintech development, an increasingly cooperative spirit has been spreading in the sector for some time. Many of the established banks have now recognized that they can benefit from working with fintechs.

Traditional financial service providers can learn a lot from their younger competitors, particularly when it comes to using technology and customer experience. Individually adaptable and infinitely expandable systems for process optimization not only reduce time and costs, but also offer a complete new infrastructure for financial services. Open banking supports the removal of barriers to data exchange and increases clients' control over their data. The agile mindset of fintechs also breaks down silo thinking in departmental units and creates space for strategic change. However, cooperation with an established bank also offers fintechs great advantages: With a strong and experienced partner at their side, they can scale the number of their customers and products internationally in a short period of time.

High hopes but difficult practice

As useful as cooperation between established financial service providers and fintech startups is, it is often difficult in practice. The reason for the often smooth collaboration between old and young players is the different organizational backgrounds and the divergence of corporate culture. The clash of a long-established, process-heavy major bank or savings bank with several thousand employees — often with a rather higher average age — and a dynamic fintech with usually only a few dozen, often young employees represents a culture shock and generation clash. What can be quickly turned off the fence in an agile working environment requires a fixed structure in banks and integration into auditable processes, which many start-ups in turn do not master.

It is therefore not particularly surprising that, according to the Capgemini World FinTech Report 2020, both banks and fintechs are not satisfied with the current way of working together. More than 70 percent of fintechs stated that they were frustrated with the processes in established banks. On the bank side, only 21 percent said that their systems were agile enough to work with a fintech. There are also technological backlogs in Germany, such as outdated systems in public authorities or poor Internet connections in rural regions. Accordingly, the results of previous bank-fintech cooperation fall far short of expectations and opportunities.

Win-win: communication on equal footing

The pace at which the banking sector is currently changing will not slow down in the coming years. With their technological expertise and customer-focused omni-channel approach, fintechs will therefore have a growing right to exist in the industry. Banks would do well to continue to seek cooperation with fintechs if they want to benefit from the disruption of the industry. In the best case scenario, cooperating with founders can strengthen their employer brand, help them recruit skilled workers or bring in lucrative investments.

But fintechs must also learn if they want to attract banks as partners. Different perspectives are a potential asset, as they reveal the strengths and weaknesses of one's own business model and thus expand the range of expertise equally for all sides. In the long term, fintechs can benefit enormously from working with established companies by opening up new markets and improving their products.