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Why the pandemic has put the pressure back on fintechs

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Ben Walker, Partner & CTO, Airwalk Reply

Traditionally, the only genuine threats to the incumbent banking giants were macroeconomic instability and direct competition from other industry leaders. However, over the past decade, their market dominance has been challenged by the rise of digitally native fintechs. Their innate agility, niche offerings, technical superiority and customer-centricity have allowed them to bypass the astonishingly high barriers to entry that have previously deterred new entrants.

As a result, the fintech venture ecosystem grew fast in the past decade, putting a new pressure on the incumbent banks.  Yet, perhaps surprisingly, that growth has slowed in the past few years. It may now be that the widespread financial volatility caused by the pandemic, Brexit and other political events has allowed the incumbents to wrestle back market power from the tenacious challengers that have been nipping at their heels.

So, has uncertainty encouraged people to revert to their trusted banking practices? Or should banks take this opportunity to finally invest in those long-needed digital transformation programmes or look to partner with and build alliances with their fintech competitors?

Ben Walker

Covid – a catalyst for change

Banks are highly aware of the technical debt they have accrued with their legacy software and systems, but, prior to Covid-19, many felt that the costs didn’t warrant the investment that a digital transformation would require. Despite the triple digit growth of fintechs, the number of customers actively engaged with them was still a small subset, so instead of embracing digital transformation, incumbents opted for patches and incremental improvements to their systems.

Then along came the pandemic – and more specifically lockdowns – which dictated a different way of working for most; consequently, small technical developments are no longer sufficient. A full technological overhaul is now inevitable.

The next generation customer base has different needs. They are more geographically mobile and driven by ease of access and digital interaction rather than human interaction. They don’t operate from 9-to-5. They want to consume services when it suits them. Banks have reacted to this by shutting 48% (4,735) of all of Britain’s bank branches since 2015. Digital start-ups tapped into the mobile culture early. They generally offer more convenience and better data-driven experiences. Customers can open a bank account and use their digital wallet within minutes, not days. Rapid innovation via microservice architecture and APIs gives digital banks great flexibility. By contrast, legacy banking platforms are complex, less agile, and more costly to run.

If legacy banks wish to compete with the digital-only banks properly they now know that they need to invest in modernising and integrating their back-end systems; not just focusing on the front-end, customer experiences.

Despite fintechs’ convenience and clear understanding of their customer base’s needs, there is still uncertainty around whether they can offer enough to fully convince people to turn their backs on traditional banks. Incumbents are able to tap into far superior resources to offer free overdrafts, mortgages, loans etc. As such, fintechs have broadly stayed in the ‘holiday spending’ space.

Partnerships – a lifeline for fintechs as well as traditional banks?

For banks, digital transformation requires an entirely different technology stack and a different type of architecture. It is more about building a full ecosystem than a platform. As a result, much of the narrative in the past few years has explored the potential benefits that incumbents could gain from partnering with digital-first start-ups due to their expertise with new technologies.

However, there is really nothing stopping banks from undergoing this transformation alone. So as changing consumer habits force the banks’ hands, now is the time for fintechs to seriously pursue forming partnerships with large banks. The window of opportunity for fintechs to form partnerships may be narrowing. Their previously attractive offer to help banks leapfrog to their expertise level is less enticing as incumbents proceed alone with their own digital transformations.

The pressure may indeed be transitioning back on fintech, so why should they seek out partnerships before the opportunity fades? Firstly, challenger banks, while nimbler, face a much higher chance of failure. They don’t have the luxury of government protectionism that is provided to incumbents that are vital to the economic health and prosperity of a nation. Fintechs also are more likely to operate with significant losses, opting to aggressively grow their platforms at the expense of profits. This has led to rapid customer gain, but this business model lacks a sustainable future.

Essentially, challenger banks have built some impressive digital experiences and have demonstrated that they capable of doing very well in retail banking, e.g., Starling. But this is not where the big opportunities lie. The cross-sell of other banking products (loans, mortgages, savings etc.) is the truly lucrative segment of the industry. On this front, fintechs, who often operate as single product shops, are unable to compete with the varied portfolio of incumbents. Furthermore, whilst challenger banks have shown a desire to scale up, they lack the knowledge of how to successfully do so. Incumbents, however, have ample experience in international expansion and dealing with regulatory authorities and jurisdictional challenges.

For now, the banking industry is at a crossroads for both fintechs and the big banks, with partnerships offering one solution to the problems that both sides face. However, in the wake of the pandemic, the ‘sleeping giants’ of the industry may begin to awaken and, if so, fintech will need to make their move sooner rather than later. Whatever happens, while banks and fintechs battle it out, the real competition lies in wait.  Tech giants, the likes of Google and Apple in particular, are poised to majorly disrupt the whole industry. So perhaps it’s time that the banking competitors dropped their shields and worked together to win in this brave new world.

 

Finance

In-Store, Online & In-App – Unifying Payment Authentication

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Michel Roig, President of Payment and Access, Fingerprints

 

Often, new technologies are lauded as the death of existing ones. This has been undoubtedly true in some areas. Think audio cassettes and CDs, Betamax and VHS, fax machines and email… and a host of other examples. Sometimes the market and product vendors can influence this decision but, mostly, consumers decide which technologies win based on the value they bring to their everyday lives.

Often though, new technologies coexist with, and complement, existing ones. This is very much the case in the payments ecosystem. The advent of mobile payments had many claiming the death of the humble payment card. In a world still using cheques and with significant innovation happening across both mobile and card payments, the card is not going anywhere for the foreseeable future because consumers choose different payment methods based on different situations and preferences.

But, as new payment methods are made available to consumers, and each keeps evolving, the payments ecosystem needs to ensure that the security, convenience and user experience is consistent. This blog will trace the adoption of card and mobile payments, discuss the need for strong authentication and highlight the role biometrics is playing in enabling unified experiences for consumers.

Card & mobile payment adoption

There is still a mix of how consumers make in-store payments today. For example, Fingerprints research found that more than 70% of consumers elect to use their cards most often, compared to less than 5% choosing their smartphones.

But mobile contactless is growing. Mobile payment experience enabling the same (or better!) convenience of traditional card payments, with additional security and more opportunities for richer experienced and value added services like loyalty and discount integration. Because of this, for example, last year the U.S. saw in-store grow by 29%.

Additionally, we can consider in-app and online mobile payments. Allied Market Research reports the global in-app purchasing market size was valued at $76.43 billion in 2019 and is projected to reach $340.76 billion by 2027, growing at a CAGR (compound annual growth rate) of 19.8% from 2020 to 2027.

Safety first, right?

It’s clear that contactless transactions are growing, but safety is still a concern for a lot of consumers, particularly with cards.

Consumers around the world have come to love the convenience of contactless. While 77% of consumers use contactless regularly, half are worried about the lack of security if their card is lost or stolen and around a quarter are confused about spending limits.

And even as contactless use was rocketing, fraud was a cause for concern. According to UK Finance’s latest Annual Fraud Report, lost and stolen card fraud incidents increased by 1% between 2020-21, despite this being a time when normal high-street shopping habits were drastically altered due to pandemic restrictions. Worryingly, the same report highlighted that when pandemic restrictions were eased in late 2021, contactless fraud on payment cards and devices went up 20%.

Historically, the authentication methods for card, mobile and online payments have been diverse and inconsistent. Biometrics is helping to unify, strengthen and simplify the payment authentication process, no matter where or how consumers choose to pay.

Biometrics bringing benefits

One innovation helping consumers – that increasingly demand more convenient, secure and hygienic payment experiences – is the addition of biometrics to strengthen and unify authentication.

After over a decade of integrations, mobile is the most mature and established market for consumer biometrics, and we now estimate that more than 80% of smartphones sold now incorporate some form of biometric sensor.

Recently Fingerprints celebrated that its own sensors have been integrated in more than 650 mobile device models globally, in nine out of the top ten smartphone OEM brands. But this is by no means a static market.

Crucially, continued adoption is being driven by innovation. Ongoing R&D on the biometric sensors and software are enabling biometrics to support broader product development and innovative use cases. This is supporting ongoing mobile adoption and diversification into other devices like payment cards.

Ongoing momentum is down to biometrics’ fundamental benefits; the technology’s ability to strengthen security and authentication while maintaining or even improving the user experience by removing the need to enter PINs and passwords.

Unifying the authentication UX

On top of these core benefits, biometrics can also help banks and card manufacturers to harmonize the payment authentication experience. Consumers are already used to unlocking their smartphone with a fingerprint sensor. With mobile payments and banking apps on the rise, biometric authentication is now increasingly common in consumer finance.  By offering biometric technology in payments cards, banks can offer their customers the same convenience and security they are used to from their mobile and in-app transactions.

Not all consumers pay for items in the same way, so the important factor is to offer trusted options that help a wide range of users. The addition of more secure authentication to cards is therefore a logical development in order to cater to the requirements of the less tech-savvy individuals all the way through to the digital natives.

Evolution not revolution

So, it is not a question of new payment technologies replacing existing ones. Technology evolves, yes. But cards are not static and, for many, will continue to be the default method of payment. For others card, mobile contactless, online, in-app and others all have a time and a place.

Moving forward, banks and other issuers can support customers by adding strong authentication to the ‘tap’ of contactless to bring it in line with mobile and in-app payments. Alongside added protection reducing fraud risks and lost revenue, it provides the convenience of avoiding contactless limits – and the confusion they can bring – altogether.

With the clear need for security that does not compromise convenience, the desire among consumers for the technology, and the readiness of the technology for mass rollout, the coming years look exciting for biometrics and its role in smarter payment experiences.

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Banking

Why the future is phygital

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By Eric Megret-Dorne, Head of Card Issuance Services and Service Operations at Giesecke + Devrient

 

Digital banking has become increasingly ingrained in people’s everyday lives. Today, 73% of people globally use online banking at least once a month. Traditional bricks-and-mortar banks, which have long relied on the in-person experience with customers, are now having to step up their offering. With new ways of working blurring the work-home boundary, banks must ensure a fast, seamless connection between face-to-face processes and virtual customer experiences.

However, this does not mean that physical and digital banking are in competition with each other. In fact, many continue to use physical bank cards, with 1.12 billion in circulation in 2021, which provides the basis for digital payments and offerings. As a result, the benefits of digitalisation should converge with the comfort of physical touchpoints to create a holistic, “phygital” experience.

The path to phygital

Banks are accelerating their digital transformation strategies to keep up with the fast pace of fintech innovations. To meet the changing needs and preferences of customers, the payment world is leveraging new technologies to create personalised experiences through a range of different channels.

While the digitalisation of banking has been underway for quite some time – particularly for younger generations – events such as the Covid-19 crisis forced banks and customers of all ages to use digital tools and processes to compensate for branch, office, and call centre closures. With branches worldwide typically operating at reduced capacity due to social distancing requirements, consumers embraced online banking to avoid both the virus and potentially long queues.

However, some consumers still enjoy physical touchpoints, meaning a digital-only approach won’t suit everyone.

Striking a balance

It’s all about options – consumers now want to freely switch between traditional and digital channels without being forced into one. But how can banks achieve this phygital balance? One way is to equip physical channels with digital capabilities, so that online tools can augment the physical experience. For example, personalised bank cards with a bespoke design can be activated digitally, offering customers an extra layer of convenience. Having to wait for a new PIN to arrive in the mail is a common bugbear for consumers, so bringing card activation processes into the digital ecosystem will ensure a more seamless experience.

Greater automation in the card issuance and activation process enables the benefits of digital to be integrated into the physical banking experience without being intrusive. For instance, self-service kiosks empower customers to print their own cards, reducing the time between acquisition and card issuance, while still allowing for in-branch expertise if needed.

The personal touch

Phygital strategies also give banks a range of valuable data insights that can help them better serve their customers. This includes data on purchasing behaviours and habits, which can then be utilised to improve banks’ offerings and unify the physical and digital brand experience. Using omnichannel data helps to build a hyperpersonalisation strategy to provide real-time services.

In this way, digital solutions help banks maximise their user experience. Whenever a consumer interact with a bank, it creates data and behaviours. With fragmented databases, legacy systems and real-time data created by interactions with third-party partners through Application Programming Interfaces (APIs), it is not always easy for banks to streamline this data from different sources. By understanding patterns in that data and behaviours, banks can tailor and personalise unique experiences for each and every user.

Where security meets innovation

With big data opportunities abound, banks should be mindful of their consumers’ security concerns. Customers are now demanding much more transparency when it comes to how information is stored and collected. At the same time, they still desire greater personalisation via digital methods. Therefore, any successful phygital strategy requires a robust digital security to ensure customers have the same peace of mind as when they complete physical transactions.

To close the gap between innovation and security, banks should utilise tokenised infrastructure, which ensures the safe provision of payment credentials and securing of customer payments across all touchpoints. This is particularly important as regulations such as PSD2 and SCA demand strong authentication requirements.

The use of a token greatly enhances the consumer experience. For example, it allows for card details to be automatically updated for subscription services upon the expiry of an existing one, avoiding any service disruption.  Multi-factor authentication can also ensure an additional layer of security, as it combines a password with verifiable human biometrics such as fingerprints or facial recognition.

Best of both worlds

Every consumer has unique preferences when it comes to banking. Therefore, banks must evolve by bringing both physical and virtual touchpoints into a ‘phygital’ world. Only a phygital approach can meet the needs of all end users – whether they favour an in-person experience, an online one, or a blend of the two. The holistic data insights, personalisation opportunities, and optimised security ensured at every touchpoint are also critical in building future-ready banks.

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