Giants by the likes of Google, Facebook, Amazon, Apple and Paypal have been shaping the Internet for a long time since its inception. While we might not think about them as direct competition to our products, they have the agility and the funds to become a sizable threat to traditional finance. In this article, I will give you examples on this growing trend and also ideas how to leverage your advantages.
What is it that makes fintechs especially good? They provide a great user-experience while connecting and leveraging legacy systems. Besides the common issue of lacking experience with handling risk associated with lending, they often face reputational and financial challenges which prevents them from being able to scale their business model. What if there was a company who could use fintech strategies, but without funding- or reputational constraints holding it back?
Founded in 1998, PayPal started out as a payment processor of (US) Bay auctions – largely replacing checks as payment within the platform. After 2000, PayPal tailored its product to cater more to business accounts. Instead of relying on interest on deposited amounts, service charges were leveraged as a new model of income. Today, with more than 200 million users worldwide and eBay dwindling in popularity, the company is positioned as a convenient way to send money across (digital) borders.
Since early 2018, PayPal is rolling out ATM-compatible debit cards, direct depositing paychecks, and FDIC insurance to its US customers. Because PayPal doesn’t have a banking license in the US, it’s not running these services, but a Delaware bank handles debit cards, a bank in Georgia deposits checks that users take pictures of, and banks in Utah offer loans to customers and small businesses.
Strategically PayPal behaves like a fintech. There are partnerships with numerous banks, to scale their services into territories that were unavailable before. The key difference is that with its strong customer base and deep pockets, PayPal could be able to truly threaten established financial services.
The disappearance of the product
PayPal Plus is a product offered to businesses on top of processing payments (e.g. in online stores). The advantages are that for an additional fee, the client gets the payment immediately and is protected against default. Sounds familiar? This is PayPal’s way of doing factoring. As a cross-border payment platform it is easy for them to offer this on top of payment processing for businesses. It is almost an afterthought in the digital realm. Online platforms are interconnecting services and as a result are making products disappear as we know. In essence, nobody cares about a service or the product itself. What customers care about are tangible benefits resulting from the use of a service.
Mobile apps are a closed ecosystem, meant only for the execution of very limited tasks. The more a company can keep the user within their ecosystem, the more business it can generate with a conglomerate of services. This is what makes big tech companies so dangerous for financial service providers – it‘s just another feature within their ecosystem. In the future, while Apple and Google are rolling out their payment systems, Amazon could offer bank accounts with free Amazon Prime, further blurring the borders between products.
Additionally, in this mobile internet age, friction should be minimized at all costs. In user experience terms, friction is defined as interactions that inhibit people from intuitively and painlessly achieving their goals within a digital interface. Friction is a major problem, because it can lead to the frustration of would-be customers to the point of abandoning their tasks – meaning the interaction with a small device needs to be simple to be effective. PayPal‘s one touch payment is one of the key elements to reduce friction for the end-user. Even switching apps, when performing different tasks is friction – another advantage for big tech, because their design across platforms is similar and as such will lead to a more intuitive customer journey. But the sky is not falling, yet.
Options to consider
There are still advantages for traditional financial service providers and I believe they lie in the analogue world. Despite most financial tasks are handled online, face to face interaction is still of the utmost importance. According to a study, 80% of 1,000 millennials still want the option of going to a physical branch to conduct their business. Explaining complex products and consulting clients about their business in person fills a gap that simple app interactions cannot provide. Additionally, it builds trust – a true business relationship. Which in turn helps to build trust in your brand. This multi-channel approach makes it possible for the client to interact with you on their terms, be it via browser, an app or face to face. We will see less physical (bank) branches, but it would be a mistake of abandoning them completely. As of now, your brand is most probably much closer connected to financial services than most big tech companies, which should be leveraged.
You probably guessed it already: there is no way around building your own platform approach. It should be very well designed in terms of its user interface to reduce friction as much as possible – the customer journey needs to be intuitive and enjoyable. Since mobile Internet is a quite mature product in 2019, there are multiple established design standards. An inhouse or outsourced user interface expert will be of essence to add value to your platform.
Furthermore, additional services are an important part of a platform. These services could go beyond providing an overview about liquidity or making transactions. If we look at the SME business market, a lot of them are in dire need of applications to help manage their business. For example, an accounting package, or a simple treasury tool to identify gaps in funding, which you then could use to cross-sell your products.
I firmly believe that a combination of good business relationships and accessible technology is the key for success in the digital age – let‘s start building it today.