By Niels Pedersen on Friday 4 December 2020
There is a large opportunity for fintechs to help consumers reduce their screen time by integrating distinct financial solutions, writes Niels Pedersen.
Even for fintech enthusiasts, there is a limit to the number of apps you can keep track of before digital fatigue sets in. Alleviating this headache could be the springboard to profitability in a post-COVID world.
According to a KPMG survey of the UK fintech sector, only about 6 per cent of fintech companies were at least breaking even as national lockdowns swept across the globe this year. Now, with multiple vaccines in sight, and the possibility of returning to normalcy, the sector must ask itself: how can we do better in 2021?
Customer needs have changed over the last 10 months, transforming the path to further growth and profitability. To understand how we must re-examine the competitive dynamics of the fintech sector.
Fintech start-ups pry customers away from banks by offering solutions that are cheaper, faster and, crucially, more convenient. This has caused an ‘un-bundling’ of financial services, wherein small players outperform larger institutions in niche areas. As consumers were happy to bear the switching costs of using multiple solutions, this has worked well.
Then, to strengthen customer relationships, fintechs seek to expand their propositions. Often, they do so by partnering with other institutions, big and small. This allows them to engage customers with a greater suite of services. This strategy has proven successful at Starling, which recently announced that it was breaking even. So is a ‘re-bundling’ of financial services on the cards?
Not quite. Fintech is unlike other industries, in that successful disruptors do not erect walls around their platforms. For example, TransferWise allows third parties to access its services via an API, thus enabling off-platform users to benefit from its solution.
This approach minimizes hassle because users do not have to jump between platforms to access different solutions. According to computer scientist Nick Szabo, one of the alleged inventors of Bitcoin, not all transaction costs are strictly financial: mental transaction costs, like the inconvenience of having to use different platforms, weigh down the user experience. Online streaming services, for instance, collectively inconvenience their users by making them launch different apps to view exclusive content. Why can’t we have all the good TV shows in one place?
Mental transaction costs can be emotional too, such as the uncertainty one feels when confronted with a decision. In this way, robo-advisors help their clients solve both a practical problem, and an emotional one: that of investment selection, and the fear of getting it wrong.
The idea of mental transaction costs can illuminate the risks, and opportunities, that COVID-19 presents to the fintech sector. At first glance, the lockdowns have accelerated the digitization of the economy, thus driving more consumers towards web-based financial services. However, with more people working from home, screen time has increased: this zaps users’ energy, decreasing their desire to engage with digital interfaces. In other words, the lockdowns have reduced consumer willingness to incur mental transaction costs.
Though it may seem counterintuitive, this is an opportunity for fintechs to help consumers reduce their screen time. By integrating distinct financial solutions, they can remove the inconvenience of having to jump between different apps. Providing niche services is no longer enough, however innovative they may be.
This can go beyond fintech, to include solutions that make customers’ lives easier. For example, Starling’s integration with accountancy software provider Xero is undoubtedly something that many of its business customers appreciate. What’s more, the integration is likely to improve customer retention on both sides, not to mention the positive reputational effects of being associated with another leading solution provider.
Thus, a successful integration must provide network effects for both sides, as in the case of TransferWise’s API. On one hand, it allows connecting banks to offer their users more holistic financial solutions. On the other, TransferWise benefits from greater liquidity (and thus lower transaction costs) on its platform.
Integrating with other solutions is not the only way of lowering mental transaction costs. As digital fatigue takes its toll, using a mobile interface can be an inconvenience in itself. As a result, there is an opportunity in offering users a greater variety of channels. Indeed, Revolut just launched a browser-based app, a feature that had been “highly requested” according to its Founder Nick Storonsky. Apparently, many of Revolut’s customers prefer using a larger screen.
Granted, any effort to reduce hassle should be prioritized on the basis of strategic fit, both on a solution, and branding, level: not all interventions are compatible with your customer proposition. That said, if a greater number of fintechs succeed in lowering their customers’ mental transaction costs, more than 6 per cent of them will soon be breaking even or better.
Niels Pedersen is a senior lecturer at Manchester Metropolitan University and the author of Financial Technology: Case Studies in Fintech Innovation. The views and opinions expressed are not necessarily those of AltFi.