Fintech - a combination of 'finance' and 'technology' - has transformed how customers interact with the financial industry.
In particular, challenger banking apps have made it easier and cheaper for customers to manage their finances and access funds and services.
As a result, we've seen digital banks, such as Starling and Monzo, become consumer favourites. For the last 5 years, the 'Best British Bank' award has gone to either Starling or Monzo.
But while banking has embraced fintech, insurance has been slower to get on board.
That's not to say the industry hasn't innovated in recent years. It has.
The pandemic caused a significant shift towards digital customer service. According to a survey by KPMG International, 46% of CEOs reported being months ahead of their pre-pandemic digitalisation plans, and 32% were years ahead.
Despite this, many key customer interactions in the insurance industry, such as making claims, are still analogue. For instance, many providers ask customers to call to report a claim, which increases the insurer's admin costs. The insurer often then passes these costs onto the customer.
So, what is fintech getting right? And what can insurers learn from them to become more customer-centric and reduce admin costs?
In this article, I consider:
- What is fintech getting right with banking?
- Why has the insurance industry been slower to adapt?
- What insurance could learn from fintech
- How Confused.com is helping insurtechs reach new customers
What is fintech getting right with banking?
According to the 2022 Fintech Effect Survey, 86% of UK consumers now use a fintech company to manage their money.
And data from Open Banking Ltd shows the number of payments made through Open Banking is increasing at a rate of 10% month-on-month.
But how were fintech challengers able to integrate with banking so well? And what does the fintech industry seem to be getting right?
There are 3 main reasons for their success:
1. Banks and fintechs are sharing data for the benefit of their customers
Banks have always had data on their customers' spending habits. For most of banking history, this was information that stayed with the bank.
But that all changed with the 2018 Open Banking Directive. This made it mandatory for banks to share customer data with approved banks, apps, or service providers, assuming customers consent to it.
These regulations have had far-reaching effects. For instance, open banking has allowed budgeting apps to access a customer's bank account directly instead of relying on exported data. This makes for a far better user experience (UX) for the customer, who can use innovative budgeting apps with just a few taps on their smartphone.
Similarly, sharing data has made it easier for lenders to assess affordability in real time. For example, customers don't have to fill out lengthy forms for each loan or finance application.
Data-sharing with fintechs has also made it easier for companies to use bank-to-bank transfers rather than relying on card payments. Because these bank-to-bank payments are cheaper than card payments, fintechs can pass those savings onto the customer. They enjoy lower fees and a smoother UX while feeling more in control of their money.
Today, almost all banks are part of Open Banking - and 4.2 million people use it. According to the Fintech Effect Survey, 91% of consumers think fintech has helped them, with half saying they feel more in control of their finances.
2. Customers can use more personalised and flexible financial apps
Fintech has shown not all customers benefit from the same tools and products.
The increase in competition from fintech start ups has enabled greater consumer choice. Customers have more freedom to select the services that suit them personally and can further customise their experiences with those services.
For instance, customers can use Wise to send money across borders at a much lower cost than ever before. Others are using budgeting apps like Emma, where they can set spending limits and manage their expenses. Others use Monzo, which allows them to save for holidays by using 'pots'.
A study from UserTesting found that consumers consistently rated the customer experience of fintechs as superior to that of traditional banks. Customers are choosing to use fintech services because of this flexibility and customer-centricity.
In light of this, traditional banks have started to launch their own fintech products, such as Natwest's platform Mettle.
We're likely to see more banks follow suit. A 2019 UK Government study found that 56% of banks put 'disruption' at the heart of their strategy by committing to more partnerships with fintech brands.
Fintech companies have fundamentally changed how customers interact with financial apps and raised their expectations of what to expect from their bank.
3. Banks and fintechs are collaborating more effectively
It's clear that the fintech and banking sectors have been working together more effectively.
For instance, almost all banks have developed APIs to allow easier integration with fintech partners. And they're continuing to improve the performance of those systems to improve customer experience.
Digital apps from traditional banks have been incorporating budgeting tools while leveraging technology like artificial intelligence for payment services such as AI chatbots.
This effective collaboration between fintech and banks has helped cultivate innovation, leading to savings for banks, more business for fintechs, and a better experience for customers.
Why has the insurance industry been slower to adapt?
Thanks in part to all these changes, the UK government hails the nation's fintech sector as one of the most impressive in the world - and rightly so. And as of 2023, the UK is home to 1,600 fintech firms, and the Financial Times reports that this is likely to double by 2030.
So why isn't the UK insurance industry engaging with fintechs like the banking industry has?
There are 3 reasons why:
1. There hasn't been as much regulatory pressure
So far, the insurance industry has had fewer incentives to do things differently. The equivalent of Open Banking, or PSD2, has yet to happen to force insurers to share their customers' data with competitors.
Regulatory changes - such as requiring insurers to have a similar 'open data' requirement that banks and fintechs have - could lead to more innovation in the industry.
Nothing is on the horizon at the time of writing. But there's clear evidence that the FCA is willing to put big changes into place to improve the customer experience and increase competition in the market.
For instance, the recent FCA General Insurance Pricing Practices (GIPP) regulation has greatly impacted the insurance industry by banning price-walking. So, it's possible that regulations could come into place that require insurers to share their data in order to offer a better experience for consumers.
You can read more about the impact of GIPP: GIPP and Insurance: How the industry is adapting
2. Data-sharing could lead to increased competition
Compared to banks, insurers know a lot more about their customers. Car insurance companies have access to driving conviction and claims histories. Travel or health insurers can see customer medical information. Home insurers know the value of a customer's property.
Because the insurer has so much information on the customer that no one else has, they can charge a higher premium. They can assure the customer they're 'risky' and that this is the best price they'll get - and hope that the customer doesn't take the time to compare pricing.
However, suppose customers can quickly share their data between insurers. They can then instantly check in with a competitor, who might have a different style of risk management, meaning they can offer the customer a lower premium.
Data-sharing would make for a far more competitive market for insurers, which can drive down premiums, and therefore profits.
3. Legacy tools are still mainstream
The databases that most insurers rely on - LexisNexis or the Motor Insurance Bureau (MIB) - are the same ones insurers have used for decades.
As of 2023, every insurer must update the MIB on who's insured and if/when they've claimed. Yet, it can take days for that information to be updated, and human error can lead to mistakes. Plus, only certain companies can access the MIB if they abide by specific rules.
This legacy technology makes it much harder for insurers to access the correct information and offer better customer solutions. It leaves customers waiting and increases the cost of admin for insurers.
Outdated databases that don't operate in real-time make it a lot harder for insurers to access and share data, as well as innovate.
What can insurance learn from fintech?
So what can insurers realistically do to emulate the success of the fintech industry?
I'd suggest a focus on 3 main areas:
1. Make data sharing a priority
Data has been at the heart of the transformation of fintech. And data - its management, quality, and ease of access - also needs to be improved in the insurance sector.
Parts of the insurance industry are already moving in the right direction.
For example, at Confused.com, we allow customers to save their data when comparing quotes, so they don't have to keep re-entering the same information. And, if the customer consents, we take information from the likes of Experian to auto-populate their application forms.
But imagine if, as a customer, all of your personal information was updated in real-time. For example, if your address changes on a new insurance product, your address history will port over, and this data will be available to all insurers.
Because they can get your data instantly, insurers would be able to provide a far more customer-centric experience.
With data-sharing prevalent throughout the industry, the customer could also be able to track their insurance history, including their claims and past deals. It could also solve claims a lot faster for customers, rather than them having to wait on insurers to check the MIB.
2. Offer more customer-centric app options
Customer surveys in the insurance industry show demand for greater digitalisation, personalisation, and improved UX.
For instance, a global survey by Accenture found that, even among older customers, over 7 in 10 wanted improved digital interactions with their insurers.
Another international survey found that most customers would like to use an app to manage their insurance coverage.
An app that embraced data sharing could let customers view all their insurance policies, claims and bonuses from all providers they've interacted with.
3.Use fintech to reduce customer's premiums
While experience is an important driver behind insurance choices, cost remains the primary concern for consumers.
Innovation in fintech has helped to cut down fees for the customer. Take Wise, for example, which made it clear to customers that they don't have to pay enormous fees to send money abroad or to change currency. More recently, some insurtechs - such as Veygo - are cutting admin fees that insurers can pass onto the customer.
By following in the footsteps of fintech, the insurance industry can find ways to cut costs and offer lower premiums for their customers.
How Confused.com is supporting innovation in insurance
As a price comparison website (PCW), Confused.com is committed to working with insurers who want to offer their customers new fintech products, services and experiences.
Here are some of the things we're doing to help move the industry forward:
- We help challenger brands gain market share by giving them distribution: 90% of UK customers use PCWs to compare deals on insurance. By adding challenger brands to our panels, we can help them gain valuable exposure.
- We feature alternative, innovative insurance offerings, such as short-term home insurance, pay-per-mile car insurance and telematics.
- We advise insurers on customer experience, conversion rates and UX: We'll tell insurers when customers are dropping off along their journey and offer consulting and implementation advice to improve the user experience.
However, as fintech has demonstrated, there are still a lot of untapped opportunities for the insurance industry.
Insurance can learn a lot from fintech about innovation
The biggest part of fintech's success has been in data. Data sharing among financial institutions and challengers has given customers greater power over their data.
As a result, customers can better choose the service and experience that suits them best. Some have chosen to use budgeting tools, while others have used foreign exchange apps.
With 86% of consumers now using some form of fintech, the industry's innovation has created something for everyone.
Fintech has laid a blueprint for how data sharing and a more customer-centric experience can transform the industry. Now, it's time for insurance to do the same.
If you want to learn more about Confused.com and our history as a consumer champion, read about our journey.