Fintech – News and Analysis

The current issue of Fortune (September 15, 2016) has a list of the fastest growing companies in the world, and 28 are banks and other financial institutions.

Okay, Facebook is on the list too,  at Number 3.

The opening note says “The behemoth banks have sometimes been vilified by protesters or scorned by politicians.” [Obviously written before the long-running Wells Fargo abusive behavior finally gained national attention.] “But here’s a different kind of responses, as customer-focused competitors rise up. Such rejuvenation is crucial for the economy…”

The list includes Bear State Financial, Banc of California and CU Bancorp which has a tight focus on Los Angeles and Orange County. Many of the banks are laser-focused on a small community for both deposits from, and lending to, locals firms and individuals.

The list also include the Intercontinental Exchange (ICE) which bought the New York Stock Exchange, which ranks just below Simmons First National Bank of Pine Bluff, Ark but above Bank of the Ozarks, in Little Rock.

It’s an intriguing list that suggests the usual focus on high tech finance may be missing some alternative business models and profit opportunities.

Regional and mid-tier banks face an uphill battle on the digital front, but have advantages they can capitalize on with some focus and determination

Alarm bells are sounding in boardrooms of regional and mid-tier banks across the U.S. Or at least they should be. The largest national banks have pulled ahead in mobile, according a recent Forrester report — the 2016 U.S. Mobile Banking Functionality Benchmark. While a year ago none of the big banks ranked at the top in Forrester’s mobile banking, this year Bank of America and Wells Fargo earned the highest scores, followed by Chase, US Bank, and Citi.

It’s a trend that spells trouble for regional and mid-tier banks, which are falling behind the industry leaders. The 2016 U.S. Retail Banking Customer Satisfaction Study from J.D. Power noted that for the first time ever the largest six banks had taken the lead in customer satisfaction, largely through better customer-facing technology.

Too Big to Fail or Too Small to Complete?

While regulators and politicians may be concerned with the big banks getting bigger, market forces will continue to favor the big banks as long as they do a better job serving their customers. According to a new Greenwich Associates report, the odds are stacked in favor of the big players, as “regional banks will struggle to keep up with mounting costs of IT investments for client benefit.”

Jim Marous, co-publisher of The Financial Brand, said the J.D. Powers report shows the big banks have made significant improvements in all digital categories. “The inability for the majority of regional and mid-sized banks to keep pace with investment in digital technology became more apparent in the most recent survey, with online, mobile and ATM satisfaction levels all being below 2015 levels,” according to Marous.

How customers feel about a bank’s digital offerings could affect their views of other banking services, from fees to face-to-face encounters, J.D. Power found. Marous warned that digital natives are no longer defined by demographics but can span a bank’s entire customer base. The big banks ranked better across multiple segments, including the coveted millennials, emerging affluents, and minorities.

A 2015 Bain & Company study of customer behavior and loyalty in retail banking shows that “for example, Chase has steadily progressed in loyalty rankings relative to regional banks, in part by developing a distinctive mobile experience. This creates a challenge for regional banks that struggle to match the investment required to lead in mobile. But the biggest winner in creating distinctive experiences is direct bank USAA,” showing that it’s not just a matter of size but also focus. Smaller banks with a digital focus are better positioned for success in the digital age.

What Can Smaller Banks Do?

Many consumers find the “not so big” banks appealing. However, as consumer behavior and preferences continue to evolve, there are steps these banks need to take to better position themselves against the surge of their larger competitors.

Realize investment in technology is no longer optional: Regional and community banks may be underestimating the importance of a strong digital offering. The big banks’ advantage in technology is not new. What’s new is how essential technology has become to everything we do, and banking is no exception. According to McKinsey, over 30% of financial services revenues could be displaced as a result of digital disruption. With the country’s largest banks achieving the highest scores in the increasingly important mobile channel, laggards are putting their business at risk.

Don’t lose the personal touch: Traditionally, community and regional banks prided themselves on providing a personalized service that helped these banks chalk up high satisfaction scores, according to the American Consumer Satisfaction Index on banking as recent as 2013.

A 2014 Gallup survey showed that regional and small banks did a better job making customers feel they are on their side. As a growing portion of customer interactions takes place through digital channels, these banks need to invest in transforming this level of personal touch to their digital platforms. Banks that do a good job with digital and personalization win with millennials, as Ally Financial is showing.

Don’t go it alone: It’s important to mention that competition is no longer coming only from traditional banks. Alternative financial services providers from Silicon Valley to Silicon Alley are enticing customers with slick and simple applications and products that slowly but surely continue to snatch business away from the banks. The big banks are doing a pretty good job partnering with FinTech companies to turn the disruptors into collaborators. Some smaller banks are following their footsteps, but not enough.

Jim Marous points to various ways in which banks of all sizes partner with FinTech companies, noting that “smaller banks cannot afford to stay on the sideline while larger banks and non-bank FinTech competitors better serve the digital consumer.” We agree.

Additional Resources

Forrester Report: Using Digital Money Management to Deliver Personalized Financial Coaching

On-demand Webinar: Up Close and Personal: The Future of Digital Banking

From Ovum, the financial services consultancy

By a slender majority of 51.9% to 48.1% the United Kingdom has voted to leave the European Union. The move will have ramifications for banking and financial services internationally as the country renegotiates its relationship with the EU and could topple London’s standing as a leading global financial center.
Nothing will change immediately, but in the short-term the industry and the IT vendors that serve it will be hit by the uncertainty that will follow the vote and through the period of renegotiation.
In the longer term, much depends on how those affect the ability of London-based Financial Institutions (FIs) to operate in the EU under ‘passporting’ arrangements. While underlying IT needs and activity will remain the same in aggregate, they may move elsewhere, as budget centers and decision-making shifts into EU countries.
In capital markets and investment banking this is a particular issue as international FIs face potential changes to their legal entity status and location of some roles. There are also questions over the future of trading and clearing infrastructures, particularly for euro-denominated securities.
Uncertainty will affect projects in-flight
While there are no immediate changes to the operating environment for FIs – all EU-inspired laws that have been transposed to UK law remain in place until amended or repealed by the UK Parliament. The vote simply triggers a sequence of actions: the decision has to be approved by the government and the UK then invokes Article 50 of the EU Treaty, which begins a period of negotiation on the terms of withdrawal that is expected to last at least two years.
During that period the fundamental drivers of IT investment for the industry and institutions across Europe will remain unchanged of course but uncertainty over the outcome of the exit negotiations will undoubtedly see imminent IT projects paused or de-scoped, while some large-scale projects may be shelved indefinitely.
The longer the period of uncertainty, the greater the risk and the impact.
From a banking perspective, some of the biggest immediate challenges will come from the loss of the UK’s ability to passport FIs into the EU. Institutions which have European or global HQs in the City will be forced to re-evaluate, with the consequences of that rippling through the supply chain.
Immediate questions will be raised over the compliance requirements around European-level initiatives and regulations such as the second Payment Services Directive (PSD II) and the pan-eurozone SEPA Inst immediate payments project. With the implementation timelines falling well within the period in which exit negotiations will take place, there will be uncertainty (and inconsistency) in the way banks will respond.
The threat to the City of London’s position as a leading trading venue is perhaps even more profound. As things stand it appears that the UK will diminish in importance as a hub for the financial services industry. At an aggregate level, total demand for software, hardware and services from financial institutions will continue to be buoyant, but vendors will need to adjust their go-to-market and implementation strategies accordingly.
Over the past 30 years London has vied with New York for the title of Financial Capital of the World, but it is worth bearing in mind that this status can be almost entirely traced to the deregulation of the City of London in the ‘Big Bang’ in October 1986 when the London Stock Exchange monopoly on securities trading was removed.
This created an influx of Wall Street trading houses and large Europeans banks to London, who brought a completely different, more aggressive, culture to the market, and who quickly snapped up local broking firms and banks.
The City of today has been built around this, creating an infrastructure of service firms such as lawyers, accountants and IT professionals that would be hard for any other European center to replace quickly, but the three decades between Big Bang and Brexit may one day be looked back on as a golden age.
Insurers face increased costs from compliance requirements
The biggest impact on the insurance industry would be regulatory. Currently insurers conduct cross border business within Europe through the provision of a single European insurance license. As a result of this ease of access to 500m customers, the UK insurance sector contributing a trade surplus of over £12Bn in 2014.
Brexit could at some point in the future require that UK insurers meet the insurance regulation of each EU member state with which they wish to conduct business – potentially meeting the varying regulatory rules of 28 countries to achieve what we currently have. The additional resources and costs to enact and maintain this would be enormous as well as make solvency and capital reserving hugely complex and inefficient reducing insurer’s capacity to write business.
Perhaps the most ironic outcome of the regulatory impact of Brexit on the insurance is seen in Solvency II. This piece of fundamental reform of the EU insurance industry, strongly championed by the UK insurance industry and having taken a decade to implement came into force at the start of 2016. The UK insurance industry which has implemented and meets these requirements, will at some point have to apply for so-called ‘Solvency II equivalence’ status as an ‘external third-party state’.
Despite the pro-leave camp view that the UK insurance industry would thrive further if it did not need to meet the costly burden of EU regulation (pointing at the Swiss insurance sector as an example), regulation is critical to ensure the robust operation of an insurance market capable of meeting all its liabilities. In Ovum’s opinion Brexit will mean a significant backwards step for the UK insurance industry incurring an overall increase in the cost of meeting compliance needs and making it more difficult to undertake international business.
Appendix
Author
Kieran Hines, Practice Leader, Financial Services Technology
kieran.hines@ovum.com
Daniel Mayo, Chief Analyst, Financial Services Technology
daniel.mayo@ovum.com
Charles Juniper, Principal Analyst, Financial Services Technology
charles.juniper@ovum.com
David Bannister, Principal Analyst, Financial Services Technology
david.bannister@ovum.com
Gilles Ubaghs, Senior Analyst, Financial Services Technology
gilles.ubaaghs@ovum.com
Noora Haapajärvi, Associate Analyst, Financial Services Technology
noora haapajärvi@ovum.com

Ovum Consulting
We hope that this analysis will help you make informed and imaginative business decisions. If you have further requirements, Ovum’s consulting team may be able to help you. For more information about Ovum’s consulting capabilities, please contact us directly at consulting@ovum.com.

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By Yaron Ben Zvi, CEO Haven Life

I came into the life insurance industry as a customer first. My wife and I had our first child, and I knew it was time to buy a policy. Having founded a financial services startup previously, I assumed that I would be able to buy a basic term life insurance policy completely online.  I was wrong. What I found was mass confusion and the inspiration for my next company.

And here I am.

Haven Life, the online life insurance agency I co-founded as a result of my own experience, turns one year old this month. We’ve knocked down many industry barriers and overall, had a fantastic year. If success is getting regulatory approval and being able to sell direct-to-consumer term life insurance policies completely online, we have been successful. If success is completely transforming the process and the way customers engage with life insurance, we still have a lot of work to do.

It’s been a year of challenges, accomplishments, and learning

The InsurTech space didn’t really exist when I started down the path of creating Haven Life. Today, the ecosystem of startups, venture capital, reinsurers, and other players thinking about how to disrupt insurance is exploding. Entrepreneurs resolved to tackle financial services, and life insurance specifically, need to be prepared for a different way of doing things and for the challenges that come with highly regulated industries.

Looking back on our first year, there are many lessons I learned (the hard way) that any new life insurance startup should make sure to understand.

If you are truly doing something new, regulation will be a challenge

Everything in life insurance is subject to regulation. The rigorous regulatory process is both intrusive and paternalistic.

I have to first start by explaining that we didn’t take the simple route. We weren’t content only slightly modifying the sales model. We wanted to focus on the complete customer experience. This meant we needed to create our own policy and launch our own platform and process for selling. It became increasingly obvious that what we set out to accomplish would be extremely difficult. But the gratification in ultimately improving the experience for the customer remains the driving force behind our commitment.

One of the most onerous parts of the regulatory process is that the customer application and on-boarding experience is all subject to intense review. Life insurance applications are part of the legal binding contract that makes up the policy, after all. So when we started down the road of creating our application, we wanted the language to be easy for a customer to understand and the online process to be simple to get through.  Keeping approachability in mind, we were able to simplify the language somewhat, using wording like “Are you the person being insured?” instead of “who is the proposed insured?”. But when we wanted to use the word ‘option’ on our application instead of the industry term ‘rider’, one of the regulators objected, claiming the word ‘option’ was unclear. We realized we could either argue with them and slow down an already lengthy approval process, or we could let it go. We let it go.

When it came to our online process, e-signature was another of the things we knew we needed. E-signing contracts has been a common practice in the financial services industry for some time so I didn’t think too much of it. Yet, not all insurance regulators have well-defined rules for that process but they still needed to review and approve it. And it wasn’t just regulators that had an opinion about our signing process. Some of our data partners were similarly influential. In the end, we were able to accomplish e-sign, but it took longer and we made more compromises than I wanted.

Of course, all of this is made more complex by the fact that insurance is regulated on a state by state basis. I initially thought The Interstate Insurance Product Regulation Commission (IIPRC), which exists to create common standards for 44 States (45 with recently approved Connecticut), would smooth all of that pain. I quickly learned that a common filing standard doesn’t prevent individual states from having specific rules, disclosures, or forms that you will have to figure out and adhere to. Enjoy.

You won’t fully own the customer experience unless you are taking the risk

With life insurance, the smallest change at the front end of your experience can have massive implications. Want to make a change to your marketing strategy? Well, that may affect your customer mix and their associated risk profile. You’ll need to run those marketing plans by the life insurance carrier or re-insurer who actually owns the risk. Want to change a question on your application? Well, that’s not only going to affect your regulatory filings, but also the underwriting rules that are being used, which means the entity taking on the mortality risk needs to be okay with that as well.

Ultimately, unless you are taking on the coverage risk yourself, there are going to be lots of parties you will need to coordinate with and get approval from in ways that will dramatically define and impact the experience you are creating.

Get ready for a different way of doing things, culturally

Customer-facing life insurance startups can pick from a few different models for breaking into the industry:

• They can serve as an aggregator or distributor of some kind, selling other insurers’ policies
• They can partner or get backing from a large life insurer and work with them to issue a policy (what we chose)
• Or, they can raise the significant funds needed to start their own life insurer and create their own policies

Each path presents its own particular challenges. In most cases, life insurance startups will need a strategy for working with carriers, reinsurers, and other industry behemoths. These players all move slower and are less comfortable with change than you are. Without these relationships, however, your  startup’s potential for true disruption is limited.

We chose to partner with, Massachusetts Mutual Life Insurance Company, to enable us to offer customers a better experience but also the blue chip financial security they should demand in life insurance. While this has kept us from completely identifying as a startup, it has ultimately delivered the best product for our customer. It’s something we are proud of and have done very well. And, historically, big life insurers and startups have had a difficult time joining forces and working together cohesively.

Still, there have been challenges and times when we move slower than we would like. When we first started working with industry players we reviewed existing customer forms and started asking lots of questions about why things were the way they were. At one point we asked why a certain signature had to be on a form and it took a few weeks to get this answer: no one knows, it’s just the way things have been done for the last 40 years or so.

The truth is, some of the lack of change in the industry is both understandable and justifiable. When the sale of one policy involves the promise to pay hundreds of thousands or even millions of dollars, small variations in processes or small mistakes can have huge impacts. The good news is that the mindset in the industry really is changing. A few years ago, trying to do things differently was viewed suspiciously – today it’s a virtue.

Data is awesome, but you won’t necessarily be able to use it

In many ways, life insurance is the original big data industry. We take many data points about customers and we then use those to try to make accurate predictions. In our case: your mortality. But there are some specific challenges in using data in the life insurance space.

Most crucial to recognize is the fact that mortality, which is the only true indication of if your sales or underwriting process is better or not, plays out over long periods of time and very large data sets. If I issue a handful of policies today, it will take me a decade or more to measure the mortality experience on that group. Yes, there are things you can still do to try and measure or change the process in the meantime, but ultimately convincing others to take financial risk becomes difficult without the mortality data to back you up.

‘Not a problem’, you say? You’ll just use historical data. Not so fast. First, you’ll be lucky to find a partner to share that data with you.  And second that historical data often either doesn’t exist (because they weren’t collecting what you needed 5 years ago) or else it exists but it’s in a form that makes it nearly impossible to work with, like handwritten on a piece of paper in the basement of a damp building.

If none of those issues apply to the model you are choosing for your startup, keep in mind one last thing: building large data sets in this space can take time. Roughly 10 million individual life insurance policies are sold annually. And when customers buy life insurance, that’s often the last time they will engage with it. So building data sets with large numbers of customer interactions can be a challenge.

For us, our partnership with MassMutual has been a huge factor in our success. In using their mortality data and understanding their existing practices, we were able to build a new real-time underwriting platform and (with the data science team) algorithmic process.  It’s one of our biggest accomplishments and our distinguishing advantage in the industry today.

The customer engagement problem is bigger than you think

Creating customer engagement with a one-off product remains a struggle. Everyone needs auto insurance. Everyone needs health insurance. Everyone needs home insurance. And everyone interacts with those insurance providers more than once. Life insurance is not mandatory, and thus, not everyone thinks they need it. And they certainly don’t think they need to interact with it after they manage to get through the less than fun buying process. That is compounded by the fact that, to buy life insurance, at some level you have to deal with two topics that are very uncomfortable for most people: their money and their mortality.

Out of the gate, I wanted to address the customer engagement issue directly and launch with a health rewards program or some kind of unique value proposition that would make Haven Life customers feel like they had purchased life insurance from the “cool” startup. Oscar Health has done a fantastic job of this.

When we tried to get traction on some of the ideas early on, we were met with resistance and realized that the regulatory, legal, and operational risks were too great for us to be able to get this out in version one. Ultimately, we decided to put those customer engagement initiatives aside and instead to focus on creating a great digital process. We learned that because of this we weren’t able to separate ourselves enough from the pack and keep customers engaged past their purchase. We are solving this now, but I wish we had fought harder for this from day one.

The industry player that can figure out a way to make their customers proud of the life insurance policy they purchased and thus make them spread the word, like Casper® has done with their almost cult-like mattress fans, will have accomplished something truly remarkable.

Looking Forward

Crucial to our model has been the promise of a simplified and digital customer experience for buying quality term life insurance. While we made a lot of progress on these in our first year, and we helped set the tone for what digital experiences can be in the industry, I can’t help but feel we could and should have pushed harder to accomplish more on all fronts. Take one example: our data now shows that our application process is still too long and our questions can sometimes be confusing. That said, I’m heartened by the fact that we now are in a position to accurately measure and identify the points in the process that still need improvement. You can be sure we are working hard to change all that.

Ultimately, the challenges we faced and the mistakes we made aren’t things every life insurance startup will necessarily have to deal with. It will depend on their approach and strategy. But having a point of view on if and how issues of regulation, culture, data, and customer engagement could impact your shiny life insurance startup is a must.

I want life insurance startups to be successful in 2016. It’s not because I want increased competition, though. It’s because their innovation paves the way for us to do more. Just like I hope that our innovation has paved the way for others.

The U.S. lags behind other countries in mobile banking, according to a new report from Adobe Digital. Based on 86 billion visits to banking sites between January 2015 and March 2016; 600+ million social impressions (from Facebook, G+, Reddit, Twitter, Google and others); and a survey of 1,000 U.S. consumers about their online financial planning, the report found that larger banks, with more than $100 billion in assets, had a significantly higher mobile share than smaller banks.

That echoes a point that Bill Sullivan, head of global financial services market intelligence at Capgemini Financial Services, made a few weeks ago. He said that conversations with bank CXOs showed a remarkable contrast between large banks, which saw the need to become digital, and some regionals and super-regionals that didn’t think fintech would impact them. Adobe found that smaller banks are failing to move to mobile and when they do, the experience is subpar.

U.S. consumers used their mobiles to visit their bank 27 times in 2015 while the number of mobile interactions was twice that in Canada, the UK and Australia.

“The retail banking landscape is fragmented in the United States,” said Matt Roberts, an analyst for ADI. “The top 10 largest banks in the United States only hold 59 percent of market share, and two of them aren’t even U.S. banks. That number is 80 percent in Australia, 90 percent in Canada, and 81 percent in the U.K. This fragmentation, and the fact that there are so many smaller, regional banks in the U.S., is inhibiting the growth and scalability of mobile banking.”

Mobile app quality is a significant motivational factor towards switching banks for Millennials and Gen X, Adobe found, although location of local branches carries the heaviest weight overall for the time being.

Tamara Gaffney, principal analyst at ADI, said U.S. banks should look across the pond to see how banks there are experiencing the mobile shift.