Coronavirus has accelerated the digitalization of banks around the world: what they had to do for several years, they had to accomplish for 3–4 months. Fintech start-ups and neobanks also find themselves in a difficult situation: technology alone is no longer enough to gain customers' and investors' trust. Mikhail Fedotov, director of subsidiary funds of Russian Venture Company, told Snob what awaits financial institutions and venture projects in this market segment.
The pandemic revealed the problems of banks, which arose even earlier. Even the most traditional global financial institutions had to organize remote customer service and remote work of employees quickly.
As predicted by A.T. Kearney, in the next three years in Europe, banks will close 40 thousand branches, 70% of operations for opening current accounts, deposits and issuing loans will be done remotely. Those who do not have enough resources for in-house development will have to look for ready-made solutions.
It seemed that neobanks and fintech start-ups would benefit from this situation. In recent years, many have gone from market newcomers to severe competitors to traditional banks. In the UK alone, the number of clients worldwide almost tripled in 2019 compared to the previous year, reaching 19.6 million. But now many of them are faced with the problem of growth. The most famous and fastest growing British start-up Revolut has found, during its international expansion, that automation alone is not enough. The company had to hire over 1,000 customer service specialists and top managers with experience in traditional banks.
The restrictions imposed during the quarantine have exacerbated the problems of neobanks and start-ups. The same Revolut expects its revenue to halve by the end of 2020: the number of transactions on which the start-up earned was down 45% due to border closures. Investors are not ready to finance projects based on pre-coronavirus estimates. Funding for fintech start-ups in the first quarter of 2020, according to CB Insights, reached its lowest level since 2017.
The recent Wirecard scandal made things worse: cheating by the top management of one of the most expensive start-ups in digital payments does not add investor confidence to new projects. After losing $2 billion from Wirecard accounts, the company filed for bankruptcy. The market value of the start-up from $28 billion (for 2018) soon afterward fell to $3 billion. The work of the German regulator BaFin, which did not detect fraud in time, was also criticized during the investigation.
In current conditions, start-ups have to take more care of their reputation. For this, it is necessary to look for new partners and models of cooperation.
For bank clients, according to KPMG, four factors have become the main factors due to COVID-19: an opportunity to cut costs, ease of purchase, brand credibility, and digital security. At the same time, buzzers and millennials do not care what format the organization provides them with: a bank, a neobank or fintech company — the main thing is that it meets their expectations. If the German N26 makes it possible to open an account in the application in 8 minutes and does not require transfer fees, this is enough to attract new customers. In 2020, the audience of N26, according to the bank, reached 5 million people.
Trust in the brand and confidence in the service's safety, among other things, affect the user's choice along with the price and convenience. Despite the lifting of restrictions imposed by the coronavirus, consumers plan to use mobile apps more often to get services. They want to know that their data is protected from fraud. For Russian clients, this is no less important: in 2019, according to EY, the country ranked third in the world in terms of penetration of fintech services, but banks themselves more often offered them. Only 13% of users were ready to trust non-financial companies providing such services on their own, in their cooperation with banks — already 45%.
For traditional banks to survive, it is necessary to reduce the costs of routine operations, improve the personalization of services and make money on non-banking digital services: for example, those that help the client select a property and assess its investment attractiveness. Cooperation with start-ups could help in this, but not all banks have the resources and experience to benefit from such collaboration.
According to Capgemini, only 6% of banks working with fintech companies have achieved the results they hoped for. Analysts see why most banks are investing in IT and improving customer experience. Still, these external innovations do not change the system from the inside. More than 70% of start-ups are also disappointed after attempting collaboration: Integration is hindered by the confusing organizational structure and fragmented work of banking departments.
In Europe, multicorporate venture funds are helping to collaborate between corporations, including banks, and start-ups more efficiently. The LP (partners) of such funds are institutional investors and corporations from various industries. Fund management teams help them select projects for their goals and share the investment risk with other partners. Start-ups, in turn, gain access to big data to test solutions and can check their technology with clients from different industries.
One of the most famous funds of this type — the German Capnamic Ventures — was founded in 2013. It operates in Germany, Austria, and Switzerland. It focuses on start-ups in artificial intelligence, Big Data, IoT, cybersecurity, fintech, and other areas. Capnamic relies on cross-industry collaboration: The fund's partners include Germany's largest state-owned bank KFW, commercial banks Commerzbank and Helaba, and Cisco, marketing agency DuMont Digital and Hahn Air.
All of these banks and corporations have a long history. To create new IT-systems and develop new products on their own in their case is long and expensive. Capnamic helps banks to consolidate their digital transformation efforts and remain competitive in an ever-evolving financial market. The role is in creating conditions for technologies to change the existing system: even in a conservative environment like banks.
For example, the German fintech start-up NDGIT, which received four million euros from the fund in 2018, invites banks to test solutions of more than a hundred European fintech services on the start-up's API platform. With its help, start-ups display how the product works on simulated test data of the bank. Banks implement proven solutions in their systems within a few weeks, not years. According to the company, 25 European banks used the platform in 2020, including Swiss UBS, Austrian BAWAG, German Solarisbank, and several other banks from more than ten countries.
Banks that see start-ups as competitors, or start-ups dreaming of «killing all banks in two years», are unlikely to survive on the market in the coming years. To win over the consumer, both need to rethink their business model and learn to take advantage of former opponents.