Ivo Gueorguiev, Co-Founder and Executive Chairman, Paynetics
Finance as a Service (FaaS) is revolutionising the financial industry as we know it. As a dynamic delivery model that improves on the old manual legacy systems, it provides companies with quality finance management processes using advanced technologies such as artificial intelligence and process automation. FaaS also helps companies better manage their working capital, quickly deliver accurate forecasts, and reduce operating costs.
Consumers have been the key drivers behind the proliferation of FaaS. High customer expectations of financial services have caused providers across B2C and B2B to improve the quality of their user experience and the speed at which they are able to provide services.
The erosion of payment processing costs, increased customer expectations for user experience, and the reduced regulatory barriers have all helped usher in this new generation of payments.
The adoption of new financial services
Consumers have become more willing to adopt new technologies and new financial services providers during the pandemic. Visa, for example, processed 400 million extra contactless payments last year. And the number of Brits with a digital-only bank increased by 23% in 2020. Historically, getting consumers to adopt non-traditional providers has been difficult. Banks have spent years building customer relationships and delivering products, therefore they maintain strong levels of residual trust with consumers.
However, the tide is turning as FaaS reshapes the way we think about the finance products we consume. The “push” for this change comes from providers offering services which create a benefit or an unmet need for consumers. The main one being convenience in payments, with digital payments projected to hit $6.6tn in 2021, a 40% jump in two years. The “pull” is derived from something which is highly desirable to the consumer. Both need to create a compelling enough reason for consumers to move, change providers, or sign-up to a new service. What’s clear above all else, is that consumers are in the driving seat.
Consumers driving banking innovation
The adoption of new technologies and processes is always faster in consumer audiences than in business audiences. Some of the new and innovative financial services offered to consumers will need to be extended to the SME sector. This is because customers now demand the same speed and User Experience (UX) in their business dealings as they are used to receiving in their personal finances. As technologies like APIs and Open Banking enable consumers to see a range of data from different providers in one view, ease of set-up and use will become a key differentiator.
However, it’s important to acknowledge the tension between what’s good for the consumer and what makes business sense for providers. Ultimately, whoever best understands the consumer is likely to succeed in the market but there are other factors to also consider. Customer desires include product variety, lower costs, and social purpose included in offerings – such as financial inclusion or support for ESG causes. All of these demands combined pose significant challenges to the providers, who are expected to do the impossible by providing more for less.
This is why it’s essential to lower the total cost of ownership. Scaling globally will help smaller fintechs to lower their operating costs.
Future winners and losers
Customers, along with the merchants most attuned to consumer needs, will be the main winners in the shift to FaaS. Meanwhile, larger, more established firms might struggle to identify their unique offering. New market entrants that have a clear sense of their purpose and value proposition will do well.
Financial service providers poised to succeed will have a willingness to innovate, digitisation as part of their DNA, and a large customer base from which to mine user-generated data for product and service development. Hence, Big Tech poses a significant threat to both the incumbent players and the emerging fintechs. Companies like Amazon, Google, and Facebook have billions of consumers, and therefore have the rich resource of data to challenge the existing big banks.
Smaller players must be willing to form alliances and collaborate in order to make up for the huge amount of investment required to build the technological backbone necessary to remain competitive. Operational solidity is also a key building block for FaaS success; payments systems must be highly scalable, always-on, and frictionless. Those who can ensure this will benefit as the demand for such service grows exponentially.