Applying the Industry Life Cycle to FinTech
Back in 1397 the world’s first bank, Medici Bank, started onboarding customers in Italy. Fast forward to 1997 and the first Online Banking service was launched by Sumitomo Bank in Japan. Fast forward again to 2005 and the first widely regarded FinTech, Zopa, launched as a peer-to-peer lending platform in the UK. These developments have culminated in 2021 to catalyse dramatic changes across the Financial Services and FinTech landscape. By the end of 2021, there were more than 26,000 FinTech’s operating globally and annual VC investment in FinTech topping $115BN.
The Financial Services and FinTech industry growth may seem extraordinary, but if we look at history there have been numerous industries following similar growth patterns; from coal mining to steel production to railroads, all these industries have seen their own rise (and eventual decline) over time. Designed to capture this cyclical industry trend, the ‘Industry Life Cycle’, conceptualised in 1980 by Michael Porter, was formed to demonstrate the evolutionary process that new industries go through from Introduction to eventual Maturity and Decline.
The five stages of the industry Life Cycle are:
We can apply each stage of the Industry Life Cycle to different themes and events that have occurred within the FinTech industry over time to indicate where we are along the Life Cycle, peaking over the edge of the dizzying heights of the recent growth phase.
So, what’s happened so far?
Every industry is born through a new and innovative way to solve a customer problem. For FinTech, leveraging the internet and mobile technologies to service customer needs was just that. Through technology, companies could speed up processes, reduce manual intervention, break down barriers to global trade and provide better financial outcomes for consumers.
It is widely agreed that the early Millennium was the period of the Introduction phase for FinTech, promoted by increased global adoption of the internet as well as the Financial Crisis of 2008. Some companies that dominated during the Introduction phase include Zopa, offering the general UK population access to a Peer-to-Peer lending platform. Others such as Hargreaves Lansdown in the UK or BlackRock in the US are democratising access to the stock market through web and mobile platforms, and others creating digital-first banks such as Monzo in the UK and Chime in the US.
As the adoption of these services reached the wider market and the technology and skills to build these types of propositions became more readily available, we saw a period of significant growth. Between 2011-2016 the number of FinTech’s increased 21% year on year (Deloitte).
We have seen what would generally be regarded as early stage businesses achieving sky high valuations at IPO stage, including Nubank with a $41BN valuation, Paytm a $14.5BN valuation and SoFi a $8.7BN valuation.
Businesses are popping up with niche propositions that have little validation from the market, such as WiseAlpha (customers can buy government bonds directly), PrimaryBid (customers can invest in companies at IPO stage) or BullionVault (customers can buy physical gold).
A significant contributor to much of this growth products is the democratisation of tech and skills, such as back-end as a service (BaaS) companies enabling new businesses to be launched with very little up-front cost, like WealthKernel providing digital wealth services via API, or Onfido providing KYC and AML services.
During the ‘Growth’ phase we also saw the regulator working hard to keep up with the pace of change and to establish regulation to create some standards and control in the market. For example, in 2015 the FCA launched a regulatory sandbox allowing businesses to test innovative propositions in the market with real consumers. Then in 2018 we saw the introduction of government initiatives like PSD2 and Open Banking to better regulate the payment services industry.
Now in 2022, there are signs of the Shakeout phase beginning to show on the horizon. Some of the tell-tale signs include increased competition, reduced prices, and Mergers & Acquisitions (M&A), which we have ample examples of recently.
We have seen significant increased competition with over 26,000 FinTech’s operating globally by the end of 2021. We can also see examples of reduced prices, with the popularisation of commission-free trading platforms, freemium business models and referral incentives to invite friends to platforms. And finally, we’ve seen some blockbuster M&A’s such as Square acquiring the Buy Now, Pay Later (BNPL) platform Afterpay for $29BN, Paypal buying Paidy for $2.7bn and Abrdn acquiring Interactive Investor for £1.49BN.
We are now at a pivotal point in the Industry Life Cycle before we enter Maturity and eventual Decline. The next few years will see further examples of Shakeout, as unviable business models become unsustainable and eventually fail, consumers preferences and brand loyalties start to cement, and the market winners start to become evident through demonstrations and organic and strategic growth.
For businesses looking to win in the changing landscape, there are four key takeaways:
Maintain a relentless focus on user needs and invest in meeting them.
Customers will stay loyal to brands that help them achieve their goals in an intuitive and delightful way. Invest in User Experience and focus on retaining customers and creating brand loyalty to achieve sustainable growth. Customer retention is 5-25 times cheaper than customer acquisition, and this is especially relevant in the saturated FinTech market.
Avoid disruption and demonstrate differentiation to customers in a saturated market.
Keep a keen eye on the competition and look for ways to differentiate, taking lessons from overseas and different industries, and identifying gaps across competitors that you can exploit in both your product and your marketing communications to attract new customers and win the market.
Consider new markets where the Life Cycle is at a different stage for growth opportunities.
Regions like LATAM and Africa are behind the West in the Industry Life Cycle and are still in an exciting period of growth. Brazil’s NuBank currently has 40 million customers with a $41.5 billion and Interswitch in Nigeria has over 17 million users and a $1BN valuation, and these businesses are seeing significant growth with little competition at present. If businesses that have learnt valuable lessons and established scalable platforms in the West can reapply these models into unserved markets overseas, the growth opportunities are significant.
Organic growth is difficult and expensive in a saturated market, and a popular counter against that is through M&A.
Companies looking for growth should consider M&A’s to grow client bases and broaden the proposition for customers. Nowadays, M&A will likely require integration of multiple IT/business systems under one roof, which can create a significant business cost and risk. Focus on a scalable and consistent approach to IT infrastructure and providing API-enabled services to make the M&A integration process smoother, whichever side of the deal you sit on.