As an analyst at Forrester, Peter Wannemacher helps banks think about and develop their digital strategies. Peter joins us on the podcast to talk about his predictions for the financial services industry out into 2019 and beyond.
We unpack how some of the leading banks are moving the needle with new products and services. We touch on things like innovation in the back office and how this impacts the end consumer, even though they’ll never actually touch these changes. We discuss AI and what’s really happening with this set of technologies.
Peter also shares his ideas about which fintech companies he expects to flop in 2019.
2019 predictions for the financial industry
A fair amount of what’s going to happen is already in the pipe. Problems from 2017 and 2018 will become more acute and forces already at work will become far more powerful. In a couple places, we’ll actually see some breaking points.
The biggest trend is a refocusing of where priorities land and a move toward innovation in the back office. This is all stuff the end user doesn’t see. It’s a shift from solving problems on the front end to addressing bigger problems on the back end.
Banks won’t go at this alone. At the leading banks with the smartest executives, banks use a mix of their own home-grown technologies with third party software.
Take AI, for example. It is unlikely that a bank will be the one to develop the breakthrough AI system that no one else has. It’s far more likely that a big tech firm in the U.S. or China will. Or, a startup might. At the best firms, it’s probably 60/40 — the innovation comes from the outside but banks determine where and how to implement it.
Consumer banking heating up
We will see more clearly that brand differentiation in retail banking is severely lacking. Already, more than a third of U.S. bank customers agree with the statement that all banks are the same. That’s essentially the definition of a commodity. That’s what non-differentiated means.
That’s been true for a while and didn’t matter for decades. In 2019, it won’t break but I do think that it will become more of an acute problem. I think a few digital banks — including digital ventures from traditional banks like Chase’s Finn and startups like N26 — will start to take real customers and have important relationships with them, including becoming their primary banking institution.
As importantly, executives at banks will start to figure out their unique value proposition, where they fit and where their brand positioning is. They’ve been content to participate in this sea of sameness. Specialization will become more important. As an example, Azlo Bank in the U.S. is a digital challenger bank for small businesses. Poland’s Idea Bank is similar and been around a lot longer. We’ll start to see some real traction from digital disrupters in retail banking and small business banking.
Fintech failures on the way in 2019
One area we expect to have some casualties next year is robo-advisers. We think there will be a couple of full-on failures. We call robos digital investment managers and there’s a lot to love about them. They are a beautiful innovation that is really unique to the intersection of digital and financial services.
The problem is their really thin margins. It’s really tough and the goal has always been scale. There’s a saying by an executive in one of the leading robos that software scales and humans don’t. When there are a dozen brands all chasing the same clients, it can make it much harder to sustain margins.
Also, the addressable market isn’t understood. Does everyone in the world eventually want a digital investment manager? Or, is the group of existing clients working with robo-advisers most of the potential market?
Lastly, like Groupon, it’s pretty easy to replicate what those digital investment managers do. Big firms like Schwab and Vanguard are pretty successful with their own offerings. As a result, we think there will be some real failures.
Venture capital and fintech in 2019
Fintech is still juicy enough to continue to grow. In fintech, a success story may not always look like Google, Facebook or Amazon. If you look at some fintechs in the small business space, like Stripe and Xero — they’re building real ecosystems and what amounts to a platform brand that offers a wide suite of services to their customers.
VC investment should continue and I imagine it will become more diversified. A lot of money has been poured into robos, payments, p2p lending. Relatively, money will start to flow away from these sectors. Digital services for small businesses will see an increase in the number of disruptors. That’s because there’s money to be made in two ways: by building an ecosystem or by doing one thing really well for SMBs.
At Forrester, fintech includes emerging vendors and not just customer-facing companies. RPA, AI, loan processing, compliance — they’ll see more disruption.