Financial technology is heading into its next inflection point. The financial services industry’s last transformation, mobile and digital systems and apps, is morphing yet again into the age of platforms and machine learning.
The FinTech revolution is evolving into a phase of innovation in which addressing customer needs, expectations, and preferences takes precedence over disrupting the business models of incumbent financial institutions.
Entrepreneurs are filling gaps in existing services and starting to use new analytical tools to uncover new needs. “It’s a golden age of FinTech,” says Rob Pinkerton, chief marketing officer, Morningstar.
Pinkerton spoke at the Morningstar FinTech Forum, held on May 24 at Morningstar’s New York office. The panel brought together a variety of perspectives on the opportunities and challenges of building and marketing products for traditional and unchartered financial services markets.
As entrepreneurs increasingly understand financial services, the FinTech story is shifting. From its beginning, the financial technology story followed the narrative of the disruptive Silicon Valley startup challenging the sleeping legacy incumbents. FinTech companies and platform giants are making inroads in financial services: robo-advisors have built successful apps for investment management and social platforms like Apple and Google have integrated payments.
At the same time, incumbent financial services firms are focusing on innovation and learning to behave like startups. They are building or buying technologies developed by FinTech firms, especially in asset management.
Rob Pinkerton, CMO, Morningstar
“The financial technology story went from disruption to collaboration,” says Thomas Jankovich, principal, the Doblin consultancy. “We are at the next stage of development. There is a love affair between incumbents and startups. Incumbents are infatuated with shiny startups and technologies, and startups are in love with incumbents’ ability to scale. But neither of them are configured to engage. They are incompatible, and that’s the next evolution.”
The success of the initial evolution of FinTech generally is measured by the amount of venture investment in the industry. Venture investment in FinTech reached $17.4 billion globally in 2016, nearly an 11% increase over 2015, according to Pitchbook, which provides data on M&A, private equity, and venture capital investments. Investment has been slower in 2017 but is expected to increase, as more mature FinTech firms attract institutional capital.
Yet the evolution of FinTech today cannot be simply measured in dollars raised: it must be measured by the problems it solves. Financial services is fraught with problems on both the provider and consumer sides, and many of them are not distinctly technology challenges.
“People are looking too heavily at the ‘tech’ of ‘FinTech,’ and they are not focusing enough on adoption,” Jankovich says. “The technology will inevitably continue to improve but will not be of much use unless the ‘fin’ aspect of ‘FinTech’ is properly handled.”
Most if not all of the basic technologies exist and are being adopted in other countries, though the basic attitude in the United States is that the technologies must be developed here. “I find that the U.S. is still quite myopic,” he says.
A Different Breed of Entrepreneur
Today’s FinTech entrepreneurs are a different breed. The most successful care deeply about financial services, and many have a mission to help people manage and grow their wealth.
“Today’s FinTech entrepreneurs are passionate about what they are doing and know this is something that makes a difference,” says Jesse Podell, senior vice president, ecosystem development and engagement at Citi FinTech Acceleration. “They are building something that helps people’s lives and not just about getting the money and moving on to the next opportunity.”
Entrepreneurs working in FinTech must be totally responsible and buttoned down with the regulators. “You are playing with people’s money,” says Victor Pascucci III, managing partner, LightBank, a Chicago-based venture capital firm. “You’d better be serious.”
Just like traditional financial advisors, FinTech firms must understand that they are working with people’s finances, whether they are moving payments, lending cash, or managing investments. “People give money in good faith, and you must be responsible for achieving a good return on it,” Pinkerton says.
Consumers must develop a sense of trust in any FinTech firm and its technology. They need to feel that the firm will be around in the industry over the long term, especially in the wealth and asset management sector. Consumers want financial firms to be part of their long-term success and will reward companies they trust with long-term loyalty. If that trust is breached, they will quickly and decisively leave a firm: a death knell for an entrepreneurial FinTech venture.
Focus on Customers, Not Products
One thing that helps build trust is a genuine knowledge of financial services and the daily reality of consumers’ financial affairs. “Entrepreneurs need to understand the industry. They need to understand the end value that they are bringing to the consumer,” Pascucci says.
To focus on real needs, entrepreneurs need to study what people are doing with their finances in relation to their age and income level. They also need to understand what goals people want to achieve and how can technology close that gap, panelists agreed.
At this point in the evolution of FinTech, however, much of the focus is on product development and not enough about the consumers that use the products. “The focus on products in this industry is so far over the top,” says Malik Yacoubi, chief digital officer at the Cossette marketing agency and chairman, X1lab.com. “Any other industry that you look at has the customer at the center.”
Working at the intersection of profit and consumer benefit led the Center for Financial Services Innovation to FinTech early on. “We thought from the beginning that technology was going to be the answer to how we were going to deliver better financial health through financial services,” says Rachel Schneider, senior vice president at CFSI. “At the end of the line, there’s a person, and you have to keep thinking about that person.”
The Search for Mystical Millennials
The search for the “mystical millennial” provides one example of the product focus in financial services and how it carries over to market planning. Most of the advertisers that send proposals to Yacoubi and the startups that pitch Pascucci are focused on reaching members of the Millennial generation.
Millennials are not the only people using digital and mobile apps and technologies. Boomers and Gen Xers have been using these technologies longer than most people, and there is as much if not more demand for FinTech tools among those consumers.
“The reality is that not only Millennials but also Baby Boomers and Generation X do not know how to manage their money. “They need guidance as well, even on how best to spend their money,” Yacoubi says.
The needs of all the generations are not that different either. “At the end of the day, Millennials do not want anything less than Boomers and Gen Xers. There is really no difference. Everybody wants the same thing. I think the ‘Mystical Millennials’ are over-romanticized,” Pinkerton says.
How FinTech Delivers Value
FinTech delivers its ultimate value when it solves consumer problems. Panelists agreed that the needs of middle- and lower-income consumers provide good market potential for FinTech. Consumers on the lower income scale are concerned first and foremost with daily and weekly income and expense volatility, near-term liquidity, and lastly on long-term savings.
The disparity comes because the focus for most FinTech firms and their revenue models is the needs of higher-income consumers. “The top line for most financial designers is retirement savings and portfolio allocation,” Schneider says.
The insights that can provide greater value for a greater number of people lies in data—data that already exist in our financial systems. “We just haven’t connected the dots about the data we have in financial services,” Schneider says. “To me, the long-term vision is that we use the data that exists and apply predictive analytics to find out what people need to be better off.” Then FinTech firms and financial institutions can deliver a set of services and advice that may well go outside existing product lines.
Part of the FinTech proposition may also be that technology can result in new business models. For instance, the lower cost structures that FinTech apps can deliver may enable firms to profitably serve lower-income individuals while creating more wealth, whether from cost savings for financial institutions or through investment income for consumers.
Supporting savings and investments is especially close to the Morningstar mission. As Pinkerton put it, “FinTech provides a great way to help people learn to save, and they should start it early.”
Lawrence Johnson, head of FinTech engagement at Morningstar, contributed immensely to this article.