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As part of our landmark study “When Brands Become Banks” on the rising megatrend of embedded finance, we interviewed McKinsey’s undisputed banking & fintech expert Dr. Max Flötotto on why he thinks non-bank brands are flocking into the financial services sector.
The banking sector has long been considered relatively conservative, especially in Germany. Banks could be quite sure of their customers’ loyalty. To what extent is this still true?
The banking sector is changing more rapidly than ever before. Customer demands are increasing: Are processes simple and intuitive, are customer jour- neys possible completely digitally, and are services available quickly? Customers are increasingly taking their cue from their experiences at Apple, Amazon or Lieferando. Pizza comes at the push of a button, why can‘t personal loans do the same? The success of direct and neobanks and comparison platforms shows that customers are happy to accept offers of this kind - especially if their bank‘s performance no longer meets their requirements. Direct banks and neobanks now have a share of over 20 percent of checking accounts. Around 35 percent of all private real estate loans no longer come from banks directly, but from intermediaries. Even if most customers in Germany continue to have a long-standing relationship with their main bank, the willingness to switch is increas- ing: while only 12 percent of bank customers were willing to change their main bank in 2016, this figure had already risen to 17 percent by 2019. The trend is clear. And the willingness of Germans to switch is also relatively high in a European comparison. We see that younger people are more inclined to switch, as are peo- ple with higher incomes.
Dr. Max Flötotto, Senior Partner, Leader German Banking Practice & Co-Leader European Fintech Practice, McKinsey & Company
What makes customers switch financial services providers or open up to new providers?
Like customers, the reasons for switching are varied. Advertising, bonus programs and recom- mendations are becoming increasingly important, but for most customers, bad experiences with their old bank remain the most important reason for switching, e.g., unexpected or excessively high prices and fees, poor advice, or non-functioning or non-existent digital channels. In addition, it is important events in the lives of bank customers, such as moving house or buying a property, that make them think thoroughly about their financial products and consider switching banks. Depend- ing on their product needs, customers choose the best offer for them. More than 50 percent of customers now have more than one bank account, and 30 percent even have more than two. The willingness to use non- banks for financial services is also increasing. Our own research has also shown that up to 25 percent of customers can imagine conducting parts of their banking transactions via e-wallet providers or (online) retailers, for example.
Neobanks have been pushing into the market for some time. How far along is this development in Germany?
The process is still in its infancy. Despite all the successes, neobanks are still heavily focused on early adopters. Most customers continue to have their main banking relationship with a traditional branch bank. However, the market remains dynamic. Neobanks will try to reach out to the broad mass of customers via the early adopters, expand their market share and, in some cases, broaden their product range. At the same time, neobanks will have a massive influence on the development of other banks – customers will demand intuitive digital offerings and simple processes from traditional banks as well. In this context, the incumbent banks will try to counter the further growth of neobanks with fast-follower strategies and their own innovations.
The results of our consumer survey show a high willingness to obtain financial services from e-commerce providers. How will embedded finance develop in the coming years? Which sectors are in focus?
The market will continue to grow strongly and develop dynamically in the future. Here, too, the focus is on customer journeys: where and how can financial services be integrated? Experiences from China and the U.S. show a focus on payment trans- actions, consumer finance and smaller insurance companies. Payment is no longer a separate step but disappears into the app, financing a purchase is directly part of the offer, and insurance is available on an ad-hoc basis. Crucially, most e-commerce providers have little interest in becoming a traditional bank. Regulato- ry hurdles are high and growth opportunities are fewer than in their core business. In other words, cooperation with banks is becoming increasingly important – but always with the aim of ensuring that margins end up with them and not with banks.
What factors determine whether a brand can successfully offer embedded financial services?
A well-rounded customer experience and the provision of digital and personalized customer experiences will be equally important for players that are not banks in the traditional sense. The number of customers, as well as the length of the relationship and the frequency of interaction that customers have with the brand or business, will also play a significant role. Businesses that already have a broad customer base and with whom cus- tomers interact regularly have a large advantage here. Of course, brand trust and the feeling of security should not be disregarded. Other factors include the type of business or the reputation of the industry. For example, customers show a greater willingness to use financial services provided by e-wallet providers and (online) retailers than from social media companies, for example.
The U.S. with their American Big Techs as well as China are considered pioneers of this develop- ment. Where does Europe stand in comparison?
One can observe many interesting developments in China and the USA. In China, for instance, we see the development of ecosystems around Alibaba, WeChat and PingAn that incorporate many embed- ded finance services. In the USA on the other hand, there are multiple innovations around payments, data analysis and financing. Europe lags well behind China and the U.S. - especially in the B2C sector. Admittedly, there are differences: customer prefer- ences are different, there are differing regulations and specifications with regard to data protection, and Europe hardly has any Big Techs of its own. And yet: businesses can scale more at the European level, for example, and government institutions can focus even more on enabling an innovation-friendly environment. It is therefore important that Europe develops its own ideas in a timely manner and builds a sustainable model that works for Europe.