Anyone familiar with the banking world knows how difficult it is to persuade a customer to switch banks – breaking old habits is indeed mentally difficult. But what if customers could access banking services in a different way: on the website where they buy clothes, for example, or in the supermarket they visit every week?
Over the past decade, traditional banks have made great strides in shifting to digital banking, which has allowed them to reduce fees and focus more on accessibility and convenience. At the same time, in recent years – the Covid years – we have seen explosive growth in the fintech industry, where companies leveraging innovative technologies are delivering highly personalized banking services. For example, in the United States today there are thriving niche banks that specialize in financial services for doctors, the LGBT community, and even ex-convicts. Nevertheless, there is a significant barrier to customer acquisition in the world of financial services. Customer acquisition costs are exceptionally high and it takes a long time to onboard new customers, especially for newcomers who lack reputation in the financial services industry.
Today, the financial industry is preparing for a new paradigm: the integration of financial services into popular platforms where customers are already active (Embedded Fintech). In this model, there is a unique opportunity for non-financial businesses to integrate financial services into their offerings. This improves user experience, keeps customers engaged with their ecosystem, and helps drive profits. For example, by integrating payment functionality into platforms, companies like Uber or Airbnb can make in-app transactions easier and avoid customers having to leave the app to pay for a ride or rent an apartment. Alternatively, companies could offer other integrated financial services such as point-of-sale credit or insurance. In short, it makes sense to provide financial services to customers on the platforms they already use.
Shopify is a great example of a company that has ventured into integrated finance. The e-commerce platform now offers its customers a range of solutions to secure loans and accept digital payments (Shopify Capital, Shopify Payments). The benefits for all stakeholders are clear: customers can easily use financial services, and Shopify – which already has meaningful insights into customers’ financial behavior and risk profile – is able to deliver tailored financial products. at a price commensurate with the risk.
This new era of financial services could of course leverage the promise of open banking initiatives that allow customers to take ownership of the financial data held by their banks. Thanks to open banking, non-financial companies can have better access to the financial history of potential customers, which allows them to better assess risks.
Does the coincidence of these trends imply the downfall of traditional banks? I do not believe that. Banks that identify and capture the momentum that exists today by providing more services enabled by fintech innovations will likely continue to grow and prosper. The great advantage of banks is their huge customer base, which is vital in the emerging financial landscape. In the future, fintech companies will pave the way for a more competitive and innovative financial industry defined by a model based on customer-centric financial services. Those smart enough to spot this trend in time – inside or outside the banking industry – will retain their relevance and accelerate their growth in the financial services industry for many years to come.
The author is managing partner of Team8 and former CEO of Leumi, Israel’s largest bank.
Published by Globes, Israel business news – en.globes.co.il – on March 31, 2022.
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