We were kings when fees went to zero
The title was inspired by the 1996 documentary “When We Were Kings” about the heavyweight fight of 1974 between two boxing legends, Muhammad Ali and George Foreman. In the not-so-distant future, it will also be a fitting phrase for many in the banking and insurance industries.
Readers may ask themselves why I am talking about banking and insurance in such doom-ridden terms. My bleak forecast does not stem from the notion behind the common fintech (financial technology) and insurtech (insurance technology) industry pitch that they will change their respective industries with innovation and better customer experiences. Although I firmly believe that some of the start-ups will cause significant pain to the incumbents and will indeed change their respective industries. One day, some of the existing and as-yet unlaunched FinTech and InsurTech companies will also become incumbents that other start-ups aim to disrupt.
The real threat to the financial industry will come from a radical approach to penetrate the financial market – an approach that I believe has not yet been addressed or even conceived by the competition. The emphasis is clearly on “yet”.
What is this new concept? It is simply this: offering financial services at or below cost. I have mooted this idea at many think tank events, and I thought I should write it down to share it more broadly. It is and should be a terrifying thought for many, and I strongly believe this approach will be implemented in the near future. It will bring many of the incumbents to their knees unless they prepare for what is to come by investing in technology and adapting radical business models.
People talk about the limited impact of fintech and insurtech on the incumbent business model. I must agree that at this point many start-ups have little influence if you look only at the customers they have taken away from incumbents. What the start-ups are already doing, however, is forcing many incumbents to lower their fees to better match what the smaller players offer to their clients. Moreover, start-ups have also changed customers’ expectations of the user experience.
Start-ups will also use artificial intelligence (AI) and machine learning (ML) to compete against the established financial players that have more resources – such as money, data and clients – at hand to compete. Many start-ups already use ML algorithms to build better credit risk models, predict bad loans, detect fraud, anticipate financial market behavior, improve customer relationship management, and provide more customised services to their clients. Arguably, the biggest effect of start-ups is that they continuously put pressure on incumbent profit margins. Start-ups will continue to try to change the status quo because they smell blood in the incumbent water.
The real and biggest threat to incumbents will likely originate from tech giants, such as Amazon, Apple and Facebook, and other big non-tech companies that have large customer and employee bases. These organisations will use their customers and employees to sell banking and insurance solutions, and the big financial institutions will become at best dumb pipes. The technical approaches to doing business within the fintech and insurtech industries may provide some of the tools tech giants and other large companies need to execute this strategy.
Yes, I know some readers will say that regulators will stop any attempt by non-traditional players to provide many banking and insurance services. However, I do not think regulators can or will stop the new competitors, because these companies will either obtain the necessary licenses to operate or have a bank or insurer provide third-party financial services to them. This strategy is not unlike the way in which some fintech challenger banks use the licenses of an existing bank to operate.
Why should we expect this scenario of financial industry disruption to happen? In our case, we all seem to agree that the tech giants are the ones to fear because of the big data, platform and technology knowledge they possess. In addition, tech giants have several advantages, such as the trust factor and the constant interaction with satisfied customers. Furthermore, studies have shown that millennials would prefer to bank with tech giants such as Amazon, Facebook or Google than with the existing banking players. And last but not least, are the tech giants and start-ups that keep setting the bar higher for exceptional customer experience (for instance Apple’s simplicity or Amazon’s instant gratification) and shape the client behaviour and expectations, not the incumbents.
All that speaks to tech giants’ favorable circumstances as serious competitors that are not yet ready to come in at full speed and hit the financial industry broadly, but it does not point to the need to fear an extreme disruption as I projected. I do not believe we will see those tech giants providing whole-spectrum financial services anytime soon, but they have the potential to offer services in certain segments, such as providing payment, lending or insurance options for their customers and employees.
What is terrifying to imagine is a situation in which tech giants or other big companies provide financial service solutions at or below production costs. No, that is not a typo; I mean providing financial services for nothing – for free.
If we take this scenario to its extreme – that is, selling banking or insurance services for nothing (yes, for zero pounds, euros, dollars or renminbi) – then we have a situation in which financial institutions in their present forms will die or be reduced to shadows of their current selves.
That can and will happen, and I will tell you why: large companies could do exactly that – selling at or below cost – to win or keep customers. The new competitors would not need to earn money and could even afford to lose money in offering financial solutions if these features entice customers and new potential clients to use the companies’ core offerings. Remember that Facebook, for instance, earns the biggest portion of their profits through advertising because they have created a great platform through which people love to interact.
Financial solutions would be just another great offering (especially if they are offered for free) to entice many people to join the tech giants’ ecosystems. Alternatively, car companies such as GM could provide their employees and customers with very cheap or no-cost (no cost to customers, at cost for the company) banking or insurance solutions.
Don’t forget that banking and insurance solutions can be provided at very little cost as white-label services from third parties that already have all the necessary licenses, technology and infrastructure.
All is not lost for banks and insurers, but it will be very hard for them to compete against savvy tech giants on their technological home turf. The financial industry has to think fast to find ways to compete before their business oxygen runs out.
The “at or below cost” approach to financial service solutions is not a far-fetched scenario for tech giants and other companies that are trying to find new ways to attract and keep clients. The banking and insurance industries must at least get very comfortable with the idea that low-cost or free financial services are coming.
A tsunami is often unnoticed in the open sea, but once it approaches the shore, it causes the sea to rise in a massive, devastating wave. The financial industry needs to determine if the threat by tech giants and non-tech companies is a small wave or a tsunami and prepare accordingly. My recommendation to all financial institutions is this: you’d better prepare for a tsunami even if all you see is a small wave on the horizon.
This article was originally published on Forbes.
Written by Spirios Margaris (@SpirosMargaris). Spiros is ranked the No 1 global fintech influencer and the No 2 insurtech influencer by Onalytica. He regularly appears in the top three positions of established global industry influencer rankings. He is also ranked worldwide the No 11 AI influencer by Jay Palter Social Advisory and the No 10 blockchain influencer by Right Relevance. He is a speaker at international fintech and insurtech conferences, and he publishes articles on his innovation proposals and thought leadership.