The pandemic has driven an unprecedented shift in payments towards digital options. And while that move has been driven in part by sheer necessity, as consumers discover the broad range of tools FinTechs, offer their expectations for legacy institutions will only increase going forward; going back to the old way of doing business is simply not an option.
The biggest advantage traditional institutions have had to counter the strong service offerings of FinTechs has long been customer trust—but according to a December McKinsey study, that gap may now be closing as more consumers increase their usage of digital offerings. Financial industry experts at a recent Chicago Payments Forum meeting weighed in with their thoughts on the changing numbers.
“You can synthesize this information in two ways,” said John Piazza, Strategic Investments and FinTech Partnerships at Fifth Third Bank. “The first is just the increased usage of digital products and services. There’s no surprise there—when you remove the physical options, you have migration to another channel. The thing that’s more interesting is that this has opened the door for people to try new FinTech providers. This creates a significant beachhead and significant threat for incumbent institutions.”
And the FinTech providers have built a significant beachhead: more than 42% of respondents to the McKinsey survey—all financial decision makers—reported they now use at least one FinTech, with more than 6% noting they’d opened their first FinTech accounts after the start of the pandemic.
“When people try and experiment with something that’s better, they tend to stick with it,” Piazza said. “A lot of people have now tried out FinTech providers who in many cases offer far superior functionality. That’s big. Especially older customers, because they have low fragmentation of relationships but high penetration. When another provider comes in, they tend to take over a significant piece of the wallet share. Those are everyone’s most valuable customers really.”
A substantial number of those older customers—some 26% of Baby Boomers—noted a reliance on at least one FinTech account, which suggests that shift isn’t a trend on the horizon, but one that’s already arrived.
“The trust that FinTech companies see now is equivalent to what many banks see,” Piazza said. “That’s bad for incumbents and really good for FinTechs. If you look at the published reports and stock prices, that reflects this development.”
There are still challenges to be met for FinTechs in the space, however. Despite a large bump in ecommerce transactions over the past year, consumer payments FinTechs have not seen a large increase in usage. The FinTechs benefiting most from growth in transactions are companies like Stripe, Ayden, and Braintree – providers that largely do not have direct-to-consumer relationships. Breaking through in this area may require more advances, still, particularly in the realm of faster payments – and for more traditional financial institutions, FinTech partnerships in this area may be key.
“I get calls constantly asking about faster-payments services Zelle, RTP, or FedNow functionality,” said Attila Csutak, Vice President and Product Manager in KeyBank’s Enterprise Payments division. “Particularly Zelle. They’ve done a great job these last two years marketing their solution, and now they’re marketing to the small businesses as well, offering the capability to send funds across their network from a consumer and to other small businesses. So we’ve gone to a very aggressive digital marketing campaign, and we’ve seen a significant range of growth since then of people enabling their accounts for Zelle.”
At core, it’s that priority shift in the project pipeline that may lead to even more dramatic surges in FinTech activity down the line.
“I’m amazed these institutions are going at the speed they are to modernize,” Csutak said. “Even the FinTechs have changed their mentality; they’re a lot more user-friendly with banks. They’ve realized if they’re not assisting banks more aggressively they’re going to lose out.”
