One of our earlier blog entries already illustrated why German banks stumble in the face of digitization. Their long existing traditional structures and processes don’t really fit into the modern world of the far digitized customer. Quite contrary to the offerings of FinTechs (an expression combining the terms “financial services” and “technology”), for whom an opportunity in the market has only developed because of the banks’ hesitant digitization.

FinTechs position themselves along the entire value chain

FinTechs have emerged in the course of digitization, therefore operating within the scope of digital business models and products is inherent in their nature. Yes, FinTechs cannot offer the complete portfolio of banks (yet). However, they position themselves with individual services close to the customer along the entire value chain. They either seize market share from banks directly —for instance through online portals for private loans— or they position themselves between bank and customer, for example by offering online payment systems. The most well-known example for the latter is probably PayPal, who redirect the payment transaction of an online purchase via their own company portal. How successful this business model actually is shows the following statistic, according to which PayPal has become worth more than several leading banks:

Digital Transformation Banking

Market capitalization of PayPal and selected banks in million euros.
Source: graph based on Statista.

Success factors of FinTechs

Number26 from Berlin is one example of many currently much-discussed FinTechs. The start-up offers a bank account in combination with a banking app for smartphones. Thus, it doesn’t only focus on a purely digital, but also mobile business model. The verification of identity, for instance, can be done via video call directly within the app (using IDnow) and it’s possible to get push notifications in real-time with any account activity. Investors believe in this type of banking, too—the entrepreneurs from Berlin just closed a round of financing  raising $40 million (via CNBC).

The question remains: why are start-ups like Number26 so successful? Well, first of all, because of their customer orientation that is imprinted on their DNA. They work with the highest possible transparency towards their customers, develop user-friendly products and adapt the provision of their services to the fast-paced lifestyle of their clients. For instance, blocking and unblocking the bank card can be done with only one click in the app. Furthermore, FinTechs can offer their services at a particularly low price, based on their lean organizational structure and purely digital business model without any physical branches.

Digital vs. traditional?

How can traditional banks compete in times of the FinTech-euphoria? On the one hand, by focusing on their unique selling propositions. Many FinTechs don’t have a banking license yet. In addition, banks follow much stricter regulatory requirements with regard to data protection. Thus, they can score in terms of security with (potential) customers.

On the other hand, by consequently optimizing the customer journey, as banks still have a lot of catching-up to do in this area. If one wants to open a bank account on the website, for example, forms that were completed online are still too often required to be sent by mail to the bank. Being able to verify one’s identity online still remains the exception. Also, changing channels for handling banking transactions should be possible seamlessly and without any loss of information. Hence, an app for mobile devices should offer the same range of functionalities as the online banking tool on a pc.

What can banks learn from FinTechs?

FinTechs (mostly) don’t have to take such optimization measures, as they have operated digitally since their foundation. If traditional banks continue to follow their current strategy of solely transforming selectively and primarily at direct customer interfaces, they will always be one step behind FinTechs. Therefore, they must focus on the digital transformation of the backend.

In order to avoid unsystematic transformation, banks should also empower their teams to test bold digital innovations in small pilot projects. That way, they can determine by trial and error and without any significant risk what is adopted readily by customers and also feasible within their infrastructure. In case this is not possible due to internal restrictions, there is always the possibility to cooperate with FinTechs for fresh ideas rather than fighting them.

*Update on July 22, 2016: Number26 now holds a full banking license (thus far, the FinTech collaborated with Wirecard in order to be able to offer an account in combination with the banking app). One extra piece of news from July 21, 2016: from now on, Number26 only calls itself N26 (via TechCrunch).

Do you need help to push your financial services towards the digital transformation? Ask and you shall receive, we offer ample advice about analytics, digitalization and change management.