Ernst and Young: Fintech is Not Just About Tech

By Madhvi Mavadiya | 29 February 2016

15.5% of digitally active consumers have used at least two fintech products within the last six months. This finding emerged from the survey that was conducted by Ernst and Young (EY), where more than 10,000 people in the UK, Australia, Canada, Hong Kong, Singapore and the US were questioned about their current and potential future use of fintech. The traditional financial services sector is at risk of disruption and EY’s Fintech Adoption Index is evidence of this occurring worldwide.

bobsguide spoke to Thomas Bull, director of fintech at EY, about why there has been an explosion of new technology-led entrants, which industries have boomed and who is adopting fintech. As disruption increases, legacy players have to learn from fintechs about how to provide a convenient service and harness technology effectively. Bull states that EY defines “fintechs as firms that are combining innovative business models and technology to enable, enhance and disrupt financial services.”

2015 saw $12 billion being invested into fintech companies, according to the EY Global Financial Service Institute report called “Fintech is gaining traction and young, high-income users are the early adopters”. The report also highlighted that the best fintechs are always the companies that take the customers seriously. “The most promising fintech companies have a laser-like specific customer proposition - generally one that is poorly served, if at all, by traditional financial services companies - and serve up a seamless and intuitive user experience,” the report read.

The traditional sector has seen the increase in innovation to the market and some have attempted to engage with the new fintech companies by partnering, incubating, accelerating or acquiring. This is why it is important to capture the rate of fintech adoption among those who are active digitally, which is what the EY Fintech Adoption Index does.

We spent a lot of time studying fintech in 2015. Our observation was that there is huge interest in the fintech sector, and a tangible amount of investment flowing in, however we were left wondering whether anyone was really using this stuff. We wanted to get an answer to that question, which is why we launched the fintech adoption index. What we learned has made us tremendously excited, not only because fintechs are gaining real traction, but also because adoption looks set to grow rapidly in the future,” Bull said.

Bull highlighted that there are four major reasons why fintech has exploded:

  1. Technology costs have decreased
  2. Investment has flowed into the sector
  3. Governments and regulators have been supportive of fintechs
  4. Customers have adopted fintech products

Alongside this, Bull said that “although commentators often gravitate to technology as the main reason fintech has taken off, we believe it’s due these four factors working together.”

The survey results revealed that 17.6% use money transfer and payments, and this sector has boomed which poses the question of whether or not this means that the fintech industry is disregarding other industries. Bull explored how although this sector is driving adoption, there are other factors at play. “Payments products and services have often been embedded in non-financial services uses cases, like online purchases or taxi payments, as a way of lowering the friction of transactions. This has driven up adoption.”

Despite insurance and lending tech getting a lot of interest recently, the survey found that only 5.6% use borrowing fintech. Bull provides an explanation for this but sees a future for the borrowing and insurance industry. “Outside of payments, many parts of the industry have tended to focus their limited marketing resources on niche segments. However, as they gain momentum and build their financial resources, we will increasingly see fintechs targeting mainstream markets.”

The survey also found that fintech adoption is dependent on age and how much a user earns. 52.4% of 18 to 34 year olds that earn more than $150,000 currently use fintech, while only 9.4% of over 55 year olds that earn less than $30,000 use fintech. This reveals that young, high income professionals are the most valuable customers for the financial services industry and the fastest adopters of fintech. Bull predicts that “traditional banks and insurers will fight hard to protect these segments and this may involve a revised segmentation approach, and investment in omnichannel strategy.”

Hong Kong has the greatest adoption (29.1%) of all the countries surveyed and Bull said that this is because of its proximity to China. “The major Chinese fintechs such as Alipay and Tencent enjoy high penetration here, but so do many major fintechs from Western markets.” While the adoption in the UK and US as a country is low and behind Asia in the fintech race, the adoption in the major cities is high and will grow more rapidly among the broader population, “when fintechs can afford more fixed cost marketing strategies, such as TV advertising,” Bull said.

The top reason that the survey found that encouraged the adoption of fintech was the ease of setting up an account, but if traditional banks were to improve their services in this area, would customers remain with their local banks? Bull highlights that improving account opening is a key area of focus for EY.

Banks can adopt their own approach to design. They can deploy tools such as customer experience laboratories and rapid-prototyping, and use these to find better ways of designing their processes. Alternatively, they can work with fintech providers to leverage their ideas and processes, or indeed incubate fintech operations within the institution. There are a number of options or routes, therefore banks need to carefully analyse think carefully about their own strategy in response to fintech.”

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