It’s no secret that the banking world has suffered a major hit to its reputation in recent years. Rocked by a series of events from the bankers’ bonuses and PPI scandals to the economic crisis and tax payer bailouts; the finance world is no longer held in the high esteem it once was.
But while the big names in banking may be falling out of favour, numerous start-ups are rising up; providing customers with innovative products and causing disruption on a scale not seen before.
It’s heartening to see so many exciting ‘David and Goliath’ stories, with financial newcomers attacking the banking giants, using crusades to develop and launch pioneering products. I’d like to share a few of these stories with you but first let’s take a look at where the big banks went wrong.
There’s no doubt that the big names in banking still hold incredible power and I’m not suggesting they are going to disappear overnight. But it’s fair to say the financial world has been in turmoil since the economic crisis of 2008 and eight years on, the effects are still being felt.
The banks will give many reasons for these profit losses and it would take a team of top economists to unravel the various explanations. But I think it’s safe to say that banks have failed to keep customers happy and this has had an impact on profits.
So where did the banks go wrong when it came to customer satisfaction? Well, I believe the answer is twofold; firstly, a lack of innovation and secondly, complacency.
Lack of Innovation – From savings and investments to mortgages and loans, the way customers used banks remained unchanged for decades. Customers were familiar with the way things worked and rarely questioned whether there was an alternative. As a result, the banks continued to provide the ‘same old same old’ with no real innovation or differentiation. One bank was pretty much the same as another.
Complacency – The big banks thought they were untouchable. In a world where everyone needs a bank account, there was no shortage of customers. And once you’d joined a bank (probably as a teenager), you were unlikely to switch to another. This gave banks millions of loyal customers. But crucially, they were loyal through convenience not loyal through an affection for the brand.
In a bid to boost profits, many of the big finance institutions focussed on cutting costs; closing branches and making redundancies. At the same time, they failed to consider the needs and concerns of their customers.
What the financial giants didn’t predict was that a host of financial start-ups were about to step into the gap, offering innovative services coupled with excellent customer service; providing a real alternative to traditional banks.
With developments in technology, the rise of online shopping, and increased mobility, the way we access and use money has changed dramatically. We now want instant access to our money without having to carry cards and cash, we want quick decisions on loans and mortgages, and we want simple investments.
While the banks have been slow to react to changing customer needs, the lean and agile start-ups have been able to launch new products quickly and efficiently. It’s interesting that these new services have been created by newcomers; rather than by the banks themselves. Perhaps, free from the shackles of past reputation, start-ups are better placed to do this or maybe the big names are just too stuck in their ways to adapt their offering.
Let’s take a look at three financial start-ups offering innovation in finance and banking, Betterment, Stripe and TransferWise:
Betterment is an investment start-up that is changing the way people obtain investment advice. With over 175,000 customers and over $5 billion in assets under management, Betterment offers its customers lower taxes, lower fees and a higher return on investment. Economics graduate Jon Stein created Betterment as he was frustrated by the options on offer from existing brokerage firms. He believed there had to be a better way to invest rather than relying on brokers intent on beating the market. It was a simple goal and a great example of an individual with a clearly-defined crusade.
Using technology, Betterment has replaced human financial advisors with software that creates an investment portfolio based on each customer’s lifestyle, salary and investment goals. The company recommends how much money to invest and suggests the right type of account for the customer. The portfolio is then managed by Betterment so the customer can simply sit back and watch their investment grow. The benefits are clear to see. By removing the human element, Betterment makes investment decisions for its customers based purely on data and not driven by human emotions.
Created by brothers John and Patrick Collison, Stripe offers a credible alternative to payment giant PayPal and claims to be easier to integrate while offering better functionality and more transparent fees than its rivals.Today, Stripe processes billions of dollars for over 100,000 businesses in over 100 countries across the world.
As with many of the most innovative financial start-ups, Stripe emerged not from the finance world but from the world of design and technology. As a result, the payment portal has been designed from the ground up, providing exactly what customers need to buy and sell in the internet age. The business is rapidly catching PayPal as the leader in this sector but what I find really interesting is that funding for Stripe came from the founders of PayPal. It’s a great example of how an established business like PayPal can harness the power of a disruptive force, rather than trying to compete against it.
TransferWise was founded in 2011 by two Estonian colleagues, living in London, who were frustrated by the high fees involved in sending money between the UK and Estonia.
They decided to create a platform that would be able to make international transfers at a very low cost.
Today TransferWise transfers over £1 billion from one country to another, across 19 different currencies, at a fraction of the cost of traditional clearing banks.
Start-ups like Betterment, Stripe and TransferWise are giving us a glimpse into the future of finance. I’m optimistic that thanks to these innovative start-ups and others like them, the banking world will be fairer and more transparent in the future.
Technology will continue to drive innovation and I believe it’s only a matter of time before we are a truly cashless society. We can already use our phones or even a smart watch to pay for goods in bricks and mortar shops and with emerging technologies such as bitcoins and block chain, the way we spend and save is set to change dramatically. But I believe the changes will be led not by the big names in banking but by tech giants such as Apple, Facebook and Google, along with the smaller crusading start-ups who are already reshaping the finance landscape.