Fintech could potentially jeopardize around a third of all German banks revenues over the next few years, according to McKinsey and Company.
In a new report, McKinsey explores how fintech is transforming Germany’s financial sector, offering new opportunities for both entrepreneurs and banks.
“All the indications are that these FinTechs will also gain an even stronger foothold on the German market over the next years. Customers are open to change as never before,” the report says.
“By 2020 almost half of all German bank customers will have opened a digital bank account. The share of mobile banking is increasing rapidly. FinTechs are strong in these areas. In the mid-term they can challenge but also partner with banks.”
Successful fintech companies have a few things in common. Firstly, they are lean, agile and innovative. They require fewer but highly specialized staff, and hardly any physical infrastructure. Secondly, they focus on individual segments of the value chain and can often substantially undercut the fees charged by incumbents.
Two examples are Auxmoney, the startup that runs one of the largest marketplace lending platforms in Germany with over a million registered users. The company leverages Big Data for better credit scoring.
Another example is Number26, the startup behind Germany’s the first digital bank that lets customers manage their finances from a smartphone. Users can open an account in just eight minutes thanks to real-time identification provided by IDnow.
The report points out that fintech companies have so far primarily targeted private customers, leaving German corporate customers as a substantial untapped opportunity.
“The key reasons for the focus on private customers are the low barriers to entry and that less expert know-how is required for founding a fintech,” it says.
“Solutions for corporate customers are harder to realize. In the corporate arena it is not enough to be cheaper, more convenient and more user friendly. Fintechs also have to also be familiar with many nuances, invest more time in rather complex products, and build up specialist know-how for marketing them.”
The report suggests that in Germany at the end of 2015, there were over 200 reasonably sizable fintechs, some sponsored by domestic incubators such as FinLab and FinLeap.
For banks, the growing competition with fintech companies represents a challenge which could potentially cost them between 29% to 35% of their revenues.
That said, if banks undertake digital transformation of their value chain, they could increase their returns.
“The prime requirement is to keep an eagle eye on key pioneering developments,” the report advises. “Proactive market surveillance is essential.”
It concludes:
“The market is in constant upheaval – this applies to FinTechs and banks alike. Each player should investigate new technical opportunities and build its strategy on its own strengths. Customers in Germany are open to change as never before. Companies that have a compelling customer proposition with transparent products and superior service will continue to succeed in the future.”
Get McKinsey and Company’s full ‘Fintech – Challenges and Opportunities: How digitalization is transforming the financial sector’ report: http://www.mckinsey.com/industries/financial-services/our-insights/fintech-challenges-and-opportunities
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