What are the biggest risks fintech poses to banks?
The financial services sector loves to talk about the threat of fintech but what exactly are the risks and are they overblown?
It has become something of a truism in the banking industry: the rise of innovative fintech solutions are posing an ever-growing risk to the established banking business models.
But is this really the case? Banking customers are notoriously resistant to change. This is certainly true in the U.K. , with the 'big five' banks - Barclays, HSBC, Lloyds, Royal Bank of Scotland and Santander UK - still accounting for 80 percent of the UK retail banking market. In short: we have yet to see a true challenger bank break up the established order in the banking sector.
Now however, with the advent of open banking, which is forcing banks to open up their valuable customer data to third parties, the threat of fintech has never been so real.
The Bank of England itself says the UK banking sector has underestimated the threat of fintech. Back in November 2017, as part of its stress test of the major banks, the BoE found "Britain’s banks may be overstating their ability to stop 'fintech' firms stealing customers and eating into profits,"Reuters reported at the time.
The Bank of England Governor Mark Carney even admitted that fintechs could disrupt the "stability of funding of incumbent banks" - potentially forcing the central bank to "ensure prudential standards and resolution regimes for the affected banks are sufficiently robust to these risks," as reported by the Telegraph.
Fintech, that broad term for any kind of innovative solution which uses technology to make access to financial services more convenient, could mean anything from faster payments infrastructure, to a brilliant new app which shows all of your accounts in one place.
It is a term that encompasses everything from the banal - re-architecting payments infrastructure to save you money on foreign exchange (TransferWise) - to the sort of product that gives consumers bragging rights (Monzo's now-defunct Golden Ticket).
So what kind of threat do these companies pose to the giants in Canary Wharf?
This is an ever-changing landscape, but the known threats to the banks posed by fintech generally hinge on giving customers viable alternatives to lucrative services like foreign exchange, investment advice ('robo advice') and providing customers with the tools to effectively avoid taking on bad credit or falling into their overdraft.
The threats aren't just to typical retail banking cash cows like overdrafts and foreign exchange though, the fintechs are coming for the banks' most valuable customers on the wealth management side too.
Robo-advisor firms like Nutmeg, Moneyfarm and Wealthsimple, use technology to effectively replace typically expensive investment advisors, bringing down barriers to entry for people wanting to invest smaller amounts of money.
On a more existential level fintech is changing the way people think about their finances entirely, raising the bar when it comes to expectations of digital products, customer service and transparency.
Toby Triebel, European CEO at Canadian roboadvisor firm Wealthsimple sees a customer-centric approach as the biggest differentiator between fintechs and the big banks.
"Banks command trust because they are big and have been around for a long time, not because people feel they can relate to them on a human level," he told Computerworld UK. "One of the biggest areas where fintechs have distinguished themselves is by providing a really high standard of customer care and taking a customer-first approach when it comes to the design and delivery of their product."
Opportunity, not threat
Naturally the banks have sought to re-position this threat as an opportunity, talking up partnerships and innovation policies themselves.
For example, in a document on the HSBC website, Peter Wong, deputy chairman and chief executive at HSBC Asia-Pacific writes (pdf): "Fintech complements rather than threatens banking institutions. In my experience, banking has always been about technology, so today's fintech innovation boom represents evolution rather than revolution for traditional banking. It is supplementing and diversifying the existing financial system - not replacing or disrupting it.
"If we look closely, fintech is currently only focusing on a mere fraction of the financial services spectrum. To date, much of the focus of fintech has been on retail banking services - lending and financing along with payments-related products and services, where mobile and e-commerce has led to real demand from consumers.
"Big banks and fintech startups have a great deal to offer each other. Banks have a large customer base, stable infrastructure, assets and regulatory know-how. Startups provide outof-the-box thinking, technical expertise, and agility to adapt quickly to change.
"Together, they can be far more successful at improving the financial services and customer experience than if they compete against one another."
Gabriel Schild, executive director for digital business at Verizon, works with the majority of the UK's largest financial services firms. He told Computerworld UK earlier this year that the banks have three clear responses to the threat of fintech: ignore it as a fad, partnering, or a wholesale business model change.
"I see three types of response: 'it is a fad and will blow over', and obviously we don't see that as a very clever response," he said. "Another is partnering with companies. So we see clients work with fintechs in order to take advantage of these new developments. Last, we see a large group of clients make a complete business model change and see that the future is all around the platform economy."
The big banks do have a couple of advantages over their more innovative fintech siblings however: data and trust. Yes trust - better the devil you know, as they say.
A report from Bain and Company and Salesforce found that: "When we asked customers if they are willing to share more data with a provider in order to get a better product offering, 78 percent said they are willing to share with their primary bank, while 63 percent said they would share with another bank and just 43 percent would share with a non-bank."
The report advised the big banks to use this data to "build a complete picture of individual customer needs and how customers choose to meet those needs at the product and episode level" if they want to compete with fintech rivals.
It also advised that they try to beat fintechs at their own game, using their sizeable resources to design "experiences that delight the customer across multiple channels that are simple and easy to use, digital and straight through (i.e. don't need human intervention)."
What the banks and fintechs say
Tristan Thomas, head of marketing and community at fast-growing UK challenger bank Monzo believes that the unbundling of banking poses the biggest threat to the established banks.
Thomas told Computerworld UK: "Monzo is laser-focused on a current account, not mortgages or loan - so focusing on one product and making it the best you can. That is a huge threat to banks as they rely on cross-selling to make money and traditionally run current accounts as a loss-leader.
"I think the big difference for all fintech startups is this unrelenting customer focus. Banks don't tend to focus on what customers want but on how to launch new products and make more money, frankly. So that means these products like overdrafts, where they make most of their money, if you were to ask customers if that's what they want they would definitely say no. So fintechs can come at that from a fresh outlook."
Raman Bhatia, head of digital bank at HSBC UK recognises the threat of these new challengers, but sees a big enough playing field for everyone to co-exist.
He said: "We have seen several digital-only challenger banks such as Starling and Monzo gaining momentum, especially in the UK, leading conversations on whether digital alternatives could weaken the position of traditional banks.
"This notion that big banks are facing a fintech and challenger crisis is somewhat overblown. There are many players and models that will co-exist and be built on top of a bank's model to amplify an offering and improve customer experience.
"The only way to ensure continued success is through smart collaboration, which is something we have a strong history in. Recently, in a response to the Open Banking initiative, we launched our Connected Money app that enables users to view all their financial accounts in one space and placing us as the first large bank in the fintech hustle."
Guy Bridge, managing director at Finpoint, a fintech that looks to provide SMEs with transparent access to funding options, said: "The change of consumer expectations and banks being slow to adapt to those rising expectations makes for a serious threat to the incumbents."
He identifies speed of execution, greater use of automation and price pressure as three big threats fintech poses to the big banks. "Speed of execution and automation are the driving force for disrupting the financial markets not only from a user-friendliness point of view but also have a direct impact on a businesses or consumer's bottomline.
"Markets that traditional banks were pretty much dominating, such as Forex, money transfer, investment, current accounts (current accounts) are now undercut by fintech businesses," he added.
Nationwide's director of mobile and digital, James Smith, recognises that fintechs have raised the bar when it comes to digital banking products. "New entrants have set a new experience standard, they have raised the bar of what customers expect from their digital interaction with their bank," he told Computerworld UK.
"Smaller, nimbler new entrants demonstrate speed and agility in delivery that any larger organisation will be envious of. They have modern tech architectures and as a result they bring new features to market rapidly."
As a result Smith said Nationwide continues to iterate on its own mobile offering, and is always looking for ways to improve its speed to market with new features and products.
Norris Koppel, CEO at UK fintech Monese, a company making it easier to open a UK current account online, told Computerworld UK: "Challenger banks are becoming a very real alternative option to existing banking institutions, due largely to advances in technology."
"Whether it is something as straight-forward and obvious and opening an account or moving funds from one account to another, challenger banks are setting themselves apart from traditional banks in ease and convenience - due largely to the adoption and application of technology."
So the threat of fintech does not appear to be dissipating any time soon, but this can only benefit the consumer as the big banks scramble to keep up with heightened user expectations and look to adapt to the new normal of open banking.
For the big banks, the threat isn't life threatening - yet. But cash cows like overdrafts and foreign exchange are under siege thanks to a handful of fintech innovators. How the banks react to that threat is the interesting part.