Over last few weeks, wife and I have been discussing if we should get Netflix subscription or not. We already have Amazon Prime membership. Today Netflix and Amazon are competing with each other online streaming market. About 15 years ago, Netflix had a different competitor, a company named Blockbuster. Chances are you may not have heard about this company, because it went bankrupt in 2010. Blockbuster was founded in 1985 and Netflix was founded in 1997. In all fairness, Netflix was a challenger taking on an already established Blockbuster. This was a classic case of David v/s Goliath battle. Today things are completely different. Netflix operates in 190 countries, has 130 million users and company reported revenue of $11.6 Billion in 2017. On the other hand, Blockbuster has 6 stores and a very small video on demand service as part of Dish Network. This represents an amazing story of demise of an iconic brand because it didn’t adopt to changing market conditions. Blockbuster business model was all about going to store and getting CD / DVD or VCR Tape and returning it back to store. Netflix basically offered contents over Internet, so customers don’t need hassle of going to a store. Netflix digitized the experience and started to win market share at the expense of its competition.
Similar to the way Digital Netflix took on traditional business model of Blockbuster, there are few other examples. Digital Uber has provided tough competition to traditional meter-based taxi companies. Digital Facebook won rights to telecast Spanish Football (Soccer) league games across south Asia by defeating competition from media giant Sony Sports. Digital Amazon has basically transformed Retail space. Amazon has forced old school brick and mortar stores like Costco and Walmart to have an online presence. There is a reason why customers like, want and / or love digital experience it offers them convenience.
The Digital v/s traditional brick and mortar fight is really intense Financial Services sector. FinTech companies are giving banks run for their money. The banks have started to respond with their own Digital Solutions. Banks who offer great digital products are gaining customers and have positioned themselves very strongly. In July 2018, Bank of America CEO Brian Moynihan disclosed Bank now receives 75% of check deposits via self-service channels like ATM and Mobile Deposit. This is not at all surprise. For customers ability to deposit check via self service channel gives them great flexibility. They don’t need to drive to branch in middle of their work day (or weekend when there could be longer queues) to do this simple deposit. They can deposit any time they want. In case of ATM, that can be done while driving to work or coming back from Gym. Mobile Deposit offers more flexibility as you can do that from comfort of your couch while watching TV! From Bank’s standpoint these deposits via self-service channels saves them money. They don’t need to open 100s of branches, hire people and pay rent. Cost involved in self-service channel is very small. This is really good example of “win-win” situation…
Over last couple of years as more and more challengers have started to emerge, things are shaping up nicely. This has also helped clear some of the myths. Some of the Digital Only e-commerce stores are now opening brick and mortar stores. www.firstcry.com , www.pepperfry.com , www.caratlane.com and www.lenskart.com are good examples of that. In fact, FirstCry is a really fascinating story. They were taken over by Mahindra Retail who had brand in similar space. But they are going to retain FirstCry brand name as well. This is actually good news. This helps clear 2 things. First and foremost, your neighborhood store is not just going away (at least just yet). And secondly it reaffirms that for certain transactions / shopping experiences, customer prefer face to face conversation to ensure their needs are being fulfilled. This is actually a very positive sign. I personally see this pattern to continue for few more years.
This phenomenon is not limited to retail. In Financial Services sector, Banks and FinTech companies are competing with each other too. Banks have huge setup of Relationship Managers, Product Specialists, Financial Advisors, Branches and offices. FinTech companies are providing digital solutions. Lot of times Banks and FinTech companies are compared with each other and question that gets raised is about future of banking in flight of competition from FinTech. I think it’s wrong to compare Banks and FinTech in binary mode. This is not a question of either Banks or FinTech. There are multiple reasons why I say that –
- Financial Services Companies and Banks have relationship with customers built over years. They have lot of data and insight into customer’s behavior and finances. With proper Big Data and AI tools, Banks have started to capitalize on this. This data is going to open future doors. FinTech companies may not have this luxury available. So, they’re trying acquire this data from outside. A good example of this is recent news about deal between Google and MasterCard.
- In light of competition from FinTech, Banks have started to adopt and develop their own digital solutions. In some cases, multiple Banks have started to collaborate with each other to roll-out solution to customers. Previously rival banks collaborating was very hard to imagine. Zelle Money transfer network in US is good example of this collaboration. Banks were facing competition from non-banking competition like Venmo, Square Cash and Money Transfer via Facebook. Zelle is far from perfect but from Bank’s standpoint it’s a step in the right direction.
- Banks world over are heavily regulated. That’s not the case with FinTech companies. Right now, there are very few / limited regulations for FinTech companies. It’s just matter of time before regulators are going to start scrutinizing these companies. Once that happens, compliance cost for FinTech is going to up. Banks can actually make this work in their favour as their digital solutions would be compliant with regulations.
- Lot of FinTech companies are struggling to break even. PayTM one of the most famous Indian FinTech firm reported losses of ₹9 Billion ($122 Million). One way of solving this problem is expanding customer base. However due to limited regulations in FinTech space, lot of consumers are still reluctant to jump on FinTech bandwagon. In order to attract customers, PayTM has now launched a PayTM bank. So, it’s now highly regulated.
Looking at the current trends in Financial Services industry, FinTech challenge has forced the Banks to improve their Technology and Self-Service offerings. This was much needed thing in certain markets. But we’re not at the point where FinTech are going to replace Banks. I feel we’re going to see a Banks and FinTech companies collaborating offer solutions and products. Ripple Money transfer / remittance network is good example of this. India’s State Bank of India and few other Banks joined Ripple to offer cross border payments for their customers. There are similar use cases available and in future we are likely to see this trend continue.
Ladies and Gentleman, be it Retail or Finance (or other that matter in other industry segment), we’ve just started on this Digital Journey. Fasten your seat-belt as this is going to get more existing and adventurous for sure
PS – we’ve now got Netflix subscription as well. Can’t wait for Narcos Season 4! ?