Will the COVID-19 outbreak throw a fatal blow or a lifeline to fintech challengers? With customers playing it safe, or not playing at all, both traditional and non-traditional financial service providers are at a crossroads – and one route looks rockier than the other. We’ve recently sat down with Jeroen de Bel, founder of fintech strategy consulting firm Fincog, to talk about the most pressing challenges industry players face and how they can come out stronger on the other side.
How do you think the coronavirus crisis will affect the financial services ecosystem? Will it put an end to the meteoric rise of neobanks?
The consequences will be felt everywhere, from customer expectations through operations to the competitive landscape.
As for long-term effects, I expect digital acceptance to grow exponentially – even in notoriously cash-loving countries like Germany and Hungary, where most people still prefer branches to apps and stores to online shops. I’m certain that the current situation will play right into the hands of challenger banks, while driving digital transformation at established ones.
The greatest short-term impact is that funding is quickly drying up for challengers. In the long run, however, the economic fallout will severely affect both newcomers and traditional players. The latter will have to grapple with credit risk as a growing number of customers default on their debt. Alternative lenders’ credit management capabilities will be stress-tested and many of them will probably fail.
How are banking customers reacting to the crisis? Are they relying more on trusted incumbents or becoming more open to what challengers have to offer?
People in lockdown had to switch to working and doing all kinds of things digitally from one day to the next. This has also changed their relationships with banks. Before the crisis, most challenger bank customers used their accounts as a secondary account for their lunch money at work or when travelling. Stuck at home, core banking services are pretty much all they need. The other thing customers tend to be looking for in times like these is a sense of trust and stability. There’s a good chance that this will trigger flight-to-safety behaviour, with customers running back to their good old low-risk banks. That’s the theory at least. But if truth be told, I haven’t seen any evidence of this so far.
Do you think we will see more partnerships between traditional banks and fintech players or will there be an even greater divide?
Partnerships between traditional banks and fintech innovators are still relatively new and have not brought fundamental changes yet. With banks being in the thick of things at the moment, many of these collaborations have been put on hold. That said, I’m fairly certain that they will pick up where they left off in the future. Another trend that I expect to emerge is fintech acquisitions. Before the crisis, many of the rising fintechs were simply too pricey for incumbents to buy. Now that their evaluations have dropped by 50-70%, they’re there for the taking.
Can neobanks survive with their current product offerings and business models?
The traditional business model of most neobanks has been set up to mimic the tech industry. In other words, to draw in customers with a great user experience and hassle-free processes, hoping that they will be able to monetise that customer base. And of course, not stop until world domination. I don’t believe in this approach. I’m all for creating viable business models that aren’t necessarily grandiose but at least make money.
We’ll be seeing major shifts here. Neobanks will have to build profitable business models other than wanting to grow until they become the Facebook of banking. This is a mindset they must leave behind. Most of them rely on subscription-based models, trying to convert users into paying premium customers as a source of income. What traditional banks do, and have always done, is earning an interest margin on the money that they lend. I still believe in this model because to me, that’s the essence of what a bank is.
Neobanks will have to build profitable business models other than wanting to grow until they become the Facebook of banking. This is a mindset they must leave behind.Jeroen de Bel, Founder of Fincog
Neobanks are not there yet. This doesn’t mean that there aren’t opportunities for them to go into lending and become full-service banks. In fact, many of them will have no other choice. Then of course the challenge will become to separate good debt from bad debt. From what I’ve seen, alternative lenders have no problem growing their customer base fast. But making sure that what they end up with is good debt is another story.
Who will be the winners and losers of the crisis?
In fintech, those who have a cash runway of at least two years and are close to achieving profitability are the most likely to succeed. From the incumbent camp, I expect that the majority will survive. Except for those, of course, who are lagging behind in digital transformation, still relying on manual processes and brick-and-mortar branches. Rising to the digital challenge will not be something they can afford to ignore anymore.
Ready to dive deeper? Join our upcoming online panel discussion with Jeroen, W.UP’s Balázs Vinnai and other industry heavyweights about the future of challenger banks post-coronavirus. Sign up now!