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Fighting “stickiness,” some fintech firms shift away from disruption


In the early part of the 2010s, financial technology firms sought to disrupt the banking, lending, and wealth management industries with mobile apps, automated services, and offerings for millennials and consumers underserved by established institutions.

Fintech has connected with customers, but instead of total disruption, these startups have increasingly found success working with the incumbents. Among other challenges, it was “stickiness” — established firms’ strong intricate connections with customers — that got in the way.

“It’s clear that incumbents and fintech companies have different things to offer, and that’s generally acceptable now, as a way to go forward,” said Melkizedeck S. Okudo, a recent graduate of the MIT Sloan Fellows program, whose thesis work examines the role that digitization has played in disrupting the financial services industry.

“What you want as a JPMorgan is to be the first point of call any time that your client has a question about a financial product or service,” Okudo said. “You may be able to deliver a good number of these things, but not all of them.”

Growth, to a point

When fintech innovation first started to take off three or four years ago, a lot of the commentary focused on disrupting large banks, wealth management firms, and other incumbents. The list of potential disruptors included Lending Club (personal loans), OnDeck (small business loans), Moven (personal money management), and SigFig (wealth management).

These firms targeted markets that incumbents had neglected. These weren’t low-value markets, Okudo said, but simply overlooked markets: Customers with good but not great credit, millennials just getting started with wealth management, or recent graduates looking to consolidate student loan debt. “There was latent demand that was not very well served by banks at the time,” he said.

The fintech market is still in the early stages of development, but a few firms have demonstrated an ability to operate at scale and build a brand — online lender and wealth manager SoFi aired an ad during this year’s Super Bowl — but it isn’t really competing with incumbent firms yet, Okudo said.

And while fintech firms may not yet represent an existential competitive threat to banks as a whole, they do compete in certain products in certain markets. For instance, unsecured consumer loans compete against credit card products and SoFi student loans compete against bank student loan products.

Multinational banks still compete with other multinational banks, and the largest fintech firms have market capitalizations that pale in comparison to long-established firms. Plus, fintech compines found it difficult to break through the incumbent’s “stickiness,” Okudo said; simply put, it’s neither easy nor inexpensive to switch banks, lenders, or wealth managers.

And in some cases the incumbents joined forces to fight back. Mobile payment service Zelle, for example, was developed through a partnership of established banks in response to the popularity of the upstart Venmo service, which is today owned by PayPal.

If you can’t beat ‘em, join ‘em

As a result, many fintech firms have shifted strategy from disruption to partnership. Lending Club has formed relationships with more than 200 community banks. Moven is the exclusive mobile app for TD Bank in Canada and the United States. SigFig’s automation technology is available to UBS financial advisers as well as customers. JP Morgan Chase uses OnDeck to offer loans to small business customers.

For incumbents, these partnerships have become a key part of the innovation management strategy.

“There’s a gap between [a major firm’s] core capabilities and the universe of needs that a customer has,” Okudo said. “It’s expensive to maintain innovation across all these products. Partnership is delivering best-in-class products while having that relationship with the customer and making sure it’s not disrupted.”

The key is finding a fintech offering that meets a specific need, rather than looking at the fintech market as a whole and mapping to “imagined needs,” Okudo said.

In the case of OnDeck and JPMorgan Chase, he said, “the challenge is that the process of serving small businesses at scale is an expensive business, and technology made that possible.”

Some incumbents have taken this partnership model further and opened startup incubation and innovation hubs. Barclays, for example, has created a community called Rise, which has locations in seven fintech hubs around the world. In effect, this strategy allows incumbents to use fintech firms as research and development partners as they look to test or acquire different capabilities, Okudo said.

“A lot of work and thinking”

The benefits of partnership for fintech firms are a little more nuanced. Working with incumbents makes it easier to acquire “sticky” customers, Okudo noted, but fintech firms at the same time want to continue building their own brands.

When working with a multinational firm with hundreds of product and service offerings, that means making sure fintech isn’t several clicks away in a customer’s app or buried at the bottom of a financial adviser’s dashboard. Simply put, Okudo said, there’s “a lot of work and thinking” that goes into a successful partnership.

“What does partnership mean?” Okudo asked. “It’s understanding the different capabilities being brought to the table, who will invest what over time, and what are the incentives in place in order to make those commitments to invest credible over time.”

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