FinTech Ecosystems – The Future of the Financial Sector?!

CD or record players were phased out years ago with the digital transformation of the music industry, and e-commerce concepts have been booming in the retail sector for a long time. But what about the digital transformation in the financial sector? What are FinTechs changing?

Changing customer needs

The financial industry is also undergoing a fundamental transformation. The central driver of digital transformation is the dramatic change in customer behavior and the associated change in demands, which traditional players in the financial sector are often no longer able to meet and which have been shaped not least by the fundamental digital transformation of other sectors. The Corona pandemic and the social distancing measures associated with it, as well as the greater shift to the digital sphere, have accelerated this trend even further.

While customers have long relied on traditional advice from a bank or insurance advisor in their local branch, they can now obtain information digitally on their own and independently. Thanks to faster mobile networks such as 5G, increasingly powerful smartphones and, above all, apps that provide information about financial services and enable transactions to be executed or contracts to be concluded quickly, customer expectations have risen significantly. In many cases, a consultation in a local branch on a number of services and products offered by the respective provider alone can no longer meet these customer needs. Instead, customers today expect a more comprehensive and flexible range of services and that advice and products are also available outside traditional branch opening hours.

Compared with other sectors such as e-commerce, where digitization is well advanced and a functioning ecosystem has been established, the financial services industry still has some catching up to do. Banks, insurers, and especially established financial platforms with many customers (such as comparison portals) are equally vying for the pioneering role in the FinTech ecosystem. Some startups have already failed to become the central point of an ecosystem due to the lack of a sufficiently large end customer base and the fact that acquiring new customers is not only costly but also time-consuming. At the same time, traditional banks and insurance companies are facing increasingly strong competition from the expansion of large platform providers into the traditional financial products business. Both established banks and insurance companies as well as emerging FinTechs are thus faced with the challenge of how to prevail in the long term in a market characterized by changing customer needs.

Who will prevail?

Numerous experts believe that, in the long term, providers who have a high number of regular touchpoints with their customer base and who also succeed in building long-term trust with the end customer will be successful. What does that mean in concrete terms? Products and their interfaces must be designed to be user-friendly. In addition to being accessible outside traditional store opening hours, all sales channels, online and offline, should be coordinated. It is also important that digital solutions are easy to use, have a high degree of flexibility, and can be integrated into existing IT landscapes via interfaces without friction. Another success factor will be a high degree of product flexibility: Younger customers, in particular, expect to be able to choose the terms and available features of a product. For many financial products, the trend is toward “usage-based” or “pay per use” – i.e., you pay for a certain amount of usage or only when you use the product.

While many start-ups are already successfully implementing this, traditional banks and insurance companies often still have old structures in place that are unable to adequately take into account the changing behavior and new needs of their customers. But another key factor in achieving high customer loyalty is trust. Key points for this are additional services, targeted investments in the brand and its digital presence, and last but not least, a high level of data security and functioning compliance that meets regulatory requirements and guarantees security. Here again, the strengths of traditional market players come into play, who often have both a broad customer base and established processes for protecting data and meeting compliance requirements.

Establishment of a FinTech ecosystem

The key to meeting radically changed customer needs and the increased demands on products and services, therefore, lies in coherent collaborations between financial service providers and FinTechs and the establishment of a functioning ecosystem. Such ecosystems bring together the best of both worlds and enable a clear focus on the future. However, FinTech ecosystems also mean a change in mentality – especially on the part of established players. “We are in a very strong process of change right now: whereas banks used to focus on doing everything themselves, integrated and ‘on premise’ as much as possible, that is now breaking down completely and banks are willing to work together with platforms,” said an industry expert in the podcast “EY FinTech & bEYond.” After all, only a functioning FinTech ecosystem can meet the evolved demands of customers and thus stand up to competition from the BigTechs.

This is because an intelligent ecosystem not only offers opportunities for more cooperation between established financial service providers and innovative FinTechs, but also for greater integration between traditionally rather separately offered products and services. This not only enables offers tailored more individually to the customer, but also increases customer loyalty in the longer term. After all, the more offers customers receive on a platform, the more loyal they will remain to it. As much as the development in the financial sector differs from that of other sectors – this lesson, which the music industry and e-commerce have learned, also applies to FinTech ecosystems

Florian Gmach

Florian Gmach ist Director im Bereich Strategy & Transactions mit Schwerpunkt auf Transaktionen und Übernahmen bei Finanzdienstleistern und FinTechs. In diesem Kontext ist er Teil des Moderatorenteams des Podcasts ‚EY FinTech & bEYond‘, in der die deutsche EY FinTech Practice Trends, Entwicklungen und Erfolgsstrategien im FinTech-Segment mit spannenden Gästen aus der Branche diskutiert.