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By HPA Consultant Luiz Zorzella
Banks, insurance companies, and investment firms have been investing, partnering, and defending against new fintech entrants. Now, to avoid the backdraft of COVID-19, they should revisit their strategies.
For the past decade, financial services companies have monitored the fintech and insurtech sectors closely.
Seen simultaneously as a threat and an opportunity, companies have wrestled with strategic questions such as how to position themselves to capture the fintech upside, how to defend and manage against the downside, and how to identify winners and losers in a fast-evolving ecosystem.
Besides investing and partnering with high potential candidates, most have also taken pre-emptive actions to solidify their own business model against fintech attacks. Often this meant becoming more efficient, but most banks, insurance companies, and investment firms also invested heavily to transform client experience and strengthen their position in key markets.
However, this plan needs an update.
First, the current crisis has been and will continue to be taxing on less capitalized players – especially those who were trading margins for growth. Most new entrants fall in this category – even when they are backed by incumbents – and will have a hard time maintaining the level of investment required to deliver fintech upside value and pursue growth.
Additionally, insights around customer needs have and will continue to shift. Most fintech attackers rely on very specific insights as cornerstones of their business models to create value and, while most can be extremely agile to make even structural changes to pursue this value (the “pivots”), they are often ill-prepared (or incapable of) changing their original insight.
Example: A client has partnered with a fintech company that is developing a new platform which can dramatically change the economics of their business and improve the value they provide to customers. The client began partnering with this company before the platform was 100% ready, so they could influence structural decisions in the development of this platform.
However, COVID has changed the needs and priorities of both the client, and the partner fintech firm. Furthermore, the client’s customers have also evolved their behavior, shifting in-flight the development and implementation of the new technology.
What should banks, insurance, and investment firms do?
- Reprice your risks and review your critical assumptions: Most firms are well into these revisions. Because there is so much uncertainty (a.k.a. the “unknown unknowns”), building extra “fat” and monitoring the crisis remain prudent. Apply this principle also to fintech attackers and partners. Grouping them into distinct categories, based on the insights these players were built on, will help companies select the right partner moves moving forward.
- Be quick and decisive in your fintech partner decisions: In making a re-evaluation of your fintech portfolio, avoid the typical biases, especially confirmation bias (selectively paying attention to evidence that supports your existing view), outcome bias (giving more weight to evidence that supports favourable or less uncertain outcomes), overconfidence (overestimation of own ability to grasp uncertainty), fear of uncertainty (preference for quantifiable data) and endowment effect (overvaluing items you own).
- Redefine strategy: Business literature and strategy firms center the dialog on defining which markets and trends to focus on based on a firm’s strengths, market opportunities, and the relative position of different players. However, these are standard practices to create sound strategy – not what strategy is. At its core, strategy is about choice around the question, “What will you do to win?”. One needs instead a list of clearly defined short and medium-term must-win imperatives, and then can approach fintech within the framework of these imperatives.
- Prepare to attack: There are two related opportunities to prepare for: 1) Assessing fintech and customer whitespaces with a new lens – either because customer needs have changed and no player is adequately responding to the new needs, or because distressed fintech players are incapable of making the investments necessary in their markets; and 2) Strategic acquisitions or acqui-hires. Firms that selectively and proactively review the landscape during crisis will have access to fintech opportunities at radically different terms than outside the crisis.
Luiz Zorzella is a former McKinsey Engagement Manager and expert in the fintech sector, bringing over 20 years of experience working with senior leaders to create strategic growth, enter and execute in new markets, accelerate in current markets, and sustain perpetuating growth engines.