What I learnt from the Oxford Said FinTech Course – part 1
I spent the last ten weeks taking part in the Oxford Siad Business School FinTech course. The course was split into ten modules that cover the various aspects of the FinTech landscape.
In a series of blogs, I aim to collect my thoughts and share what I learnt. In this first blog, I have tried to synthesise the whole course into a high-level overview of how FinTech will impact the competitive landscape.
Part 1 – how the financial landscape will change
A number of regulatory changes and technology advances will re-mould the world of finance. PSD2 and Open Banking, where your bank must share your account and transaction data with third parties, distributed ledger technology (e.g., Bitcoin) and advanced analytics (e.g., deep learning) will change how value is created and captured.
To win in consumer finance over the next decade, companies will need to be the best at one of the following:
- Lowest cost
- Strongest brand
- Fastest at innovating
Lowest cost. Open banking will revolutionise both retail and business banking markets. Marketplaces will provide price transparency, making everything but complex investments commodities. Those that can offer these commodity products at the lowest cost will benefit from a positive feedback loop. The lowest price will attract more customers, resulting in a cheaper cost per customer, allowing prices to be lowered, thus attracting more customers. Legacy banks will find this impossible, their costs per customer are enormous – up to 50x that of new challenger banks. This gap presents an opportunity for challenger banks and digital banks to undercut legacy banks by offering better rates or lower fees.
Strongest brand. People are always willing to pay more for a brand they can trust. Apple, so far, has done a fantastic job of ensuring the security and privacy of their customers, and as a result is a trusted brand for hundreds of millions of people. While the reputation of legacy banks has taken a pounding in the last decade, if you gave most people £10,000, the first thing most they would do is put it in their bank. Recent adverts from some of the legacy banks suggest that the legacy banks realise this. Lloyds ‘By your side’ campaign, and focus on tradition and trust, and is a great example how the legacy banks are trying to strengthen their brands.
Fastest at innovating. Facebook out-competed Bebo and MySpace by mining data for insights, and then creating new products that added value to customers. While this at times has been controversial, banking provides a similar opportunity (and risks). Legacy banks and companies are slowed down by their old technology, their conservative and bureaucratic culture, and processes that were optimised for poor technology and poor culture. Companies that can get from insight to impact the fastest (what is technically called cycle time) will benefit in numerous ways. Innovative companies will be more profitable as new products usually command a price premium, they will also attract the best talent, gain the most media coverage and have the most loyal customers.
However, there are risks in each of these approaches. Being fastest at innovating is costly, as you have to solve problems no one has ever solved before, and you also take higher regulatory and brand risk. Customers can change their brand preferences very quickly, making it difficult to test new ideas or change existing products. Finally, being lowest cost does not matter, if your products are no longer useful (e.g., camera film).
The most significant risk is trying to compete in more than one space. All companies and all strategy are about trade-offs – where you compete, what you do and not do. You cannot be low-cost and fast at innovating or have a strong brand, as both innovation and brand building are expensive. Having a strong brand means it will be more difficult to change existing products or services or create new ones.
“Prediction is very difficult, especially if it’s about the future.” Nils Bohr
Predicting the future is very difficult, but using the past is a great place to start. Insurance aggregators turned car insurance into a commodity and precipitated a price race to the bottom. Apple has built a company around a brand of trust, security and aspiration. Facebook and Google, despite some recent setbacks, have outcompeted multiple companies, across numerous industries, due to their focus on innovation. In my view, the recent changes to financial regulation (PSD2) and several new technologies (distributed ledger and advanced analytics) will re-shape the competitive forces for financial services over the next decade.