Like any debate, fintech fan writers have a habit of employing hyperbole to make their point. If they are to be believed, banks will cease to exist due to their irrelevance, and the financial world will be run by a number of agile, slick financial technology companies through some cool apps and the people of the world would be so much better for it.
But in the cold light of day, I don’t think the fintechs really want all the responsibility that comes with a full banking licence, supporting whole economies and accepting all customers, profitable or not, constantly having to invest to respond to more regulation.
So I would like to propose a truce. I think that there’s enough business to go round, that there can be more than one winner, and no winner wants to take it all. I believe the answer is in the marketing concept of segmentation.
For the non-marketing readers, the process of segmentation breaks down the market into manageable chunks mainly defined by the way consumers choose products. Once a company has chosen the customer segments which play to their strengths and provide a sufficient return, it should structure itself and its proposition to meet its target segments’ (unmet) needs profitably.
Fintechs tend to attract the more savvy customers. They’re usually price conscious, they love a good customer experience and they’re quite prepared to move some or all of their banking for a better price or experience. But fintechs need to be careful. Whilst its great having a product or service which attracts the more sophisticated and racy end of the market, as soon as there is a shinier, cheaper option, you’ve lost them and you are unlikely to have made sufficient money to invest in the kind of upgrades necessary to keep them around.
For the banks, there is a real danger that all the cool and profitable customers move their best business to the fintechs and leave the banks with the high maintenance, low rent segments who the they’re not structured to profitably serve.
My point was illustrated by Hilton CEO Christopher Nassetta in an analyst call recently, when he talked about the competitive threat represented by Airbnb. “I strongly do not believe that they are a major threat to the core value proposition we have”. Hilton have done their homework. They found that the bulk of the new demand Airbnb has created is in top urban markets, where there’s a lot of demand for rooms. Those Airbnb travellers stay for longer and are largely focused on leisure and value. “The bottom-line is we believe that a large portion of Airbnb’s demand is incremental,” said Nassetta. “The bulk of the demand is in higher rated, high occupancy urban markets. It is longer length of stay with a predominantly leisure and value focus and staycations where customers are willing to accept inconsistent product with very limited services.”
Whilst I’m sure Hilton is feeling the impact of Airbnb, it has sharpened their focus on the market’s segmentation, their target and their proposition. They can’t hold back the tide, but they can develop the proposition based on their corporate target’s unmet needs since that’s the segment they are financially structured to profitably service. And who knows, maybe at some point in the future, they might build a lighter proposition which does cater for the segment which Airbnb have uncovered.
Back to financial services. There is no doubt that fintechs will appeal to traditional bank customers and the banks are feeling that. But if both the fintechs and the banks insist on fighting over the whole market rather than picking the customers worth fighting for, they will both lose: fintechs get the slippery fruit flies and banks get the costly relatives who won’t leave.
How much better to co-exist: to properly understand your customers, their unmet needs and how they make their choices, and then deliberately decide which segments you can profitably serve and the others that you would choose not to target. You don’t need to turn them away, but they’re not the ideal targets around whom you’ve built your proposition. Banks and fintechs can compete for the same customer segments, but they should do so deliberately having done their sums, rather than trying to fight on all possible fronts. Some would call that strategy. Others would call it common sense.