Daily News: October 12, 2017

Report: Consumers Still Loyal to Banks but Fintech is the Future


According to Blumberg Capital’s annual fintech survey, consumers remain loyal to big banks despite a belief that traditional financial institutions are not evolving fast enough to keep up with rising consumer expectations.

Contrary to the popular belief that big banks and fintech companies are locked in a zero sum battle, American consumers want the best of both.

According to KPMG, U.S. fintech investment saw its second strongest quarter ever for venture capital investment in Q2/17, but despite increased investment pace, consumer fintech adoption in the U.S remains at only 5%.

At a high level, the survey found that public sentiment toward fintech remains positive, but there is much lower adoption by underserved demographic groups. Low-income families and older Americans remain wary of new financial technologies. The survey reveals an opportunity for big banks to leverage existing consumer loyalty to introduce new technologies that benefit more consumers by saving them money, increasing transparency and making transactions easier.

“Previously in the financial industry, capital, reputational trust and regulations were the only barriers to entry,” said David Blumberg, founder and managing partner of Blumberg Capital. “Technology is changing the game. Large financial institutions need to build or buy innovation to maintain and extend their leadership positions. As consumers demand the new technologies, we will see increased adoption or acquisition of fintech by banks to serve consumers. In addition, the fintech revolution is expanding the market, thereby positioning some pure play fintech startups to become large financial institutions of the future.”

Half of the American population prefers to use a traditional financial institution, but also seeks the benefits of new technologies and services. What’s more, more than two-thirds of Americans would trust new payment or investment technologies more readily if offered by their existing bank. The survey also examined the factors that would influence American consumers to consider switching financial institutions or services. Almost one third of respondents claim nothing could influence them to leave their bank, while nearly half said they would consider leaving for lower fees, and almost 40% would leave for lower interest rates or a higher level of security.

Other findings include:

  • 57% have a positive view of fintech startups.
  • 57% think the days of going into a physical financial institution for any reason are coming to an end.
  • 24% prefer a traditional bank and they do not want to take any risk with fintech solutions.
  • 56% are often confused about the information provided by financial institutions in billing, financial reporting and fee structures.
  • 79% want access to flexible borrowing capabilities that minimize their interest payments.
  • 63% would like an automated system that ensures they never miss an interest payment and reduces their total interest paid through optimization.

“While the average consumer may hesitate to change from traditional banking to emerging fintech products and services, the potential benefits may become too valuable to ignore,” Blumberg said. “These results indicate that for fintech startups to scale and thrive, they need to provide a product or service that is substantially better, not just incrementally better than traditional banks. At the same time, if banks don’t adapt and adopt new technologies they risk losing the next generation of customers.”
“Another investment thesis that was validated by this survey is the accelerating democratization of financial services to all, including underserved demographic groups,” Blumberg said. “Fintech products and services are providing broadening access to the benefits once reserved for institutions or the wealthy.”

While this is positive, fintech companies need to work to reach these consumers, educate them on the benefits of the new technologies and convert them into long-term users. Findings revealed a gap between low-income and high-income households and younger and older generations in willingness to use new financial technologies. The data shows low-income households and the baby boomer generation are most reticent to adopt new technology.

  • 80% think financial institutions need to focus more on helping the average consumer and small business owners rather than big business and wealthy customers.
  • 76% believe financial technology helps consumers gain more power over their finances and helps democratize financial services.
  • Those with a household income of less than $25,000 are less likely than those with a household income of more than $75,000 to say that they would like an automated system that ensures they never miss an interest payment and reduces their total interest paid through optimization (57% vs. 71%).
  • Those with a household income of less than $25,000 are more likely than those with an income of $75,000 or more to claim nothing could influence them to switch their bank (37% vs. 21%).
  • Those 55 and older are less likely than younger consumers to say they prefer to handle their financial dealings online (58% of 55+ vs. 68% of 40-54, 75% of 30-39 74% and of 18-29).
  • Those 55 and older are more likely than younger consumers to say they want a traditional bank and don’t want the risk of fintech solutions (33% of 55+ vs. 22% of 40-54, 20% of 30-39, and 19% of 18-29.
  • Those 55 and older are more likely than younger consumers to say nothing could influence them to switch financial institutions (49% of 55+ vs. 27% of 40-54, 16% of 30-39 and 19% of 18-29).

With major breaches in security at large established financial institutions such as Equifax, in which the personal information of 143 million Americans was exposed through hacking, many wonder if any institutions are trustworthy. According to the survey, Americans are skeptical about the ability of banks and fintech companies to keep information safe, but consider big banks less risky than emerging fintech companies. On the other hand, Americans don’t know much about important emerging technologies such as blockchain and cryptocurrencies. While overall sentiment is positive, there seems to be some confusion around the use, risk and benefit of these new technologies.

  • 76% worry about security with some of the new online banking and payment services. This increased from 72% in the 2016 survey.
  • 68% believe traditional banks are trustworthy and look out for customers’ best interests.
  • 51% are not confident their financial institution keeps their information secure or private.
  • 53% don’t know or are unsure of what blockchain, bitcoin and other cryptocurrencies are, yet 51% believe the latest developments in cryptocurrency will improve the financial industry by making things cheaper and faster for consumers.
  • 37% think Bitcoin and other cryptocurrencies are fake or fraudulent currencies.
  • 40% think cryptocurrencies are used by criminals or hackers to receive compensation discretely.
  • 35% believe cryptocurrencies are a viable alternative to the traditional system of currency.

Blumberg Capital is an early-stage venture capital firm based in San Francisco.