Innovation Isn’t Enough — FinTech Needs a Competitive Edge

Image Source: iStock.com/blackdovfx

Finance relies heavily on technology. But with most financial institutions and tech companies following suit on similar trends, innovation is simply not enough. And if companies hold an interest in stabilizing their competitive edge, they’ll need to succeed in must-need and sometimes failed areas.

The financial industry is experiencing unprecedented disruption, with FinTech companies leading the charge. Today, more than a quarter of Millennials have never visited a physical branch of their bank, and 39 percent would consider going entirely digital.

Unencumbered by the legacy systems of big financial institutions, FinTech upstarts introduced the idea that banking should be self-serve, mobile, and 24/7. Now, as FinTech companies are coming into their own, big banks are following their lead.

To survive the disruption that they initiated, however, FinTech startups must find a competitive advantage to stand out in a digital world.

More Innovation Means More Opportunities

In response to consumer demands for greater flexibility and convenience, large financial institutions are developing their own tech-driven solutions. We’re seeing a surge of innovation from unlikely players. Capital One has its own innovation labs. Morgan Stanley is using deep learning to parse the sentiment of financial analysts. Charles Schwab has made major investments in data and analytics, and we’re going to continue to see an upswing in innovation.

But big financial institutions aren’t the only companies to be watching. A few of the biggest players in tech already have their hands in mobile banking. WhatsApp, which is owned by Facebook, allows for peer-to-peer mobile payments. Facebook also has a free payment feature embedded in Messenger. Google Pay allows users to pay when shopping online, and Apple Cash lets users send money simply by asking Siri.

The increased competition, regulatory hurdles, and high costs of customer acquisition mean we’re going to see rapid consolidation in the space. “Large financial institutions need to build or buy innovation to maintain and extend their leadership positions. As consumers demand the new technologies, we will see increased adoption or acquisition of FinTech by banks to serve consumers,” explains David Blumberg, founder and managing partner of Blumberg Capital. “In addition, the FinTech revolution is expanding the market, thereby positioning some pure play FinTech startups to become large financial institutions of the future.”

Here’s how FinTech companies — bound for either acquisition or growth — are differentiating themselves in a crowded marketplace:

1. Offering Luxuries at Half the Price

Despite consumers’ mistrust of financial institutions, they tend to be loyal to their banks. In a Blumberg Capital survey, 30% of American consumers said they wouldn’t leave their bank for any reason. And now that major institutions have rolled out mobile banking, a sleek app isn’t going to be enough to lure consumers away.

However, 46% of survey respondents reported they would leave their bank if a company offered lower fees, and two-thirds of consumers were looking for banks with tech that goes beyond traditional services. FinTech startups looking to win over those customers need to roll out the red carpet with great customer service, low fees, and a suite of luxury banking features.

Simple, for example, Starling Bank has found its niche by integrating money management tools into its mobile banking app. Starling Bank allows its customers to roam overseas without any extra fees, and Monzo lets customers get paid a day early and put their money into separate savings “pots.”

2. Meeting the Needs of Underserved Populations

The flip side of luxury is bringing the basics to unbanked and underbanked individuals. These are populations who have been largely ignored, such as non-English speakers, people without traditional identification, and low-income individuals.

More than 14 million U.S. adults don’t have a bank account, which makes it difficult to pay bills and save money securely. Not having enough money was the top reason respondents to an FDIC survey gave for being unbanked, but 14% cited ID, credit, or former account problems as a reason for not having an account. Enter an opportunity for FinTech.

For example, IDology found its edge in working to serve the needs of unbanked and underbanked individuals by using identity verification that works for everyone. Another startup called Propel created the Fresh EBT app to serve customers who rely on SNAP for groceries. Propel found that many low-income folks struggle to afford data plans on a consistent basis, so it built in offline functionality and made it possible to link multiple EBT cards to a single device to serve customers who share a phone with family members.

3. Getting There First

Innovation is the essence of FinTech’s success. To leapfrog your competitors, you must be able to stay on the bleeding edge of the latest developments.

“For FinTech startups, speed matters,” notes Andrey Kudievskiy, founder and CEO of software design and development firm Distillery. “You can’t let your competitors get to market faster, so you need to build, execute, and innovate more efficiently than they do.” In other words, perfect is the enemy of good when it comes to FinTech disruption.

With U.S. unemployment the lowest it’s been in decades, attracting top talent who can help you innovate quickly remains the biggest challenge for employers — especially for cash-strapped startups. Outsourcing or co-sourcing talent gives companies the flexibility to bring on talent without the time and expense of recruiting, hiring, and onboarding.

4. Making Security Second to None

Three-quarters of Americans worry about the security of online banking and payment services, according to the aforementioned Blumberg survey, and perhaps they should. The Equifax data breach exposed the data of 147 million people, and the Capital One breach impacted 100 million customers.

As more FinTech companies enter the marketplace, they can’t afford to compromise security for speed. In fact, the rising popularity of online banking and the growing number of consumers who’ve had their information stolen creates fresh opportunities for companies that specialize in cutting-edge security solutions.

For example, Jumio, an AI-powered identity verification and online payment company, uses innovations like face-based biometrics, 3D liveness detection, and selfie-based authentication to prevent fraud and simplify authentication.

With big banks investing in innovation and tech giants dipping into finance, FinTech companies must continue to out-innovate their competitors. Whether they’re hoping to eat away at big banks’ market share or partner with a larger institution, the key to success for FinTech ventures is to develop unique offerings too enticing to ignore.