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Banks to face fintech challenge head-on in 2022: report

13:44, 26 January 2022

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PayTech firms are threatening traditional payment service providers, consultancy Capgemini argues – Photo: Chin Leong Teoh / Alamy Stock Photo

The line between FinTechs and incumbent banks will become blurred this year as the former forces the latter to heavily invest in digital and seek new partnerships, according to a new report from consultancy Capgemini. 

Firms such as Nubank, Square, Revolut and Stripe are disrupting conventional banks’ market share, margins and customer base by bringing “intuitive, easy-to-use, intelligent yet economical” products to market at speed, the authors state. 

Bolstered by lower regulatory barriers than traditional banks, these challenges have leveraged social media, data integration and scalable platforms to achieve a “meteoric rise”, they add.

Retail ripples

Specifically, new entrants post competition in the fields of “Buy now, pay later (BNPL), low-cost wealth management, remittances, defi/crypto and payments,” Sankar Krishnan, industry head of banking and capital markets at Capgemini, told Capital.com. “In response, banks are upgrading their suite of capabilities and launching digital clones to improve transparency, pricing, and speed of execution.”

In retail banking, according to the report, cost pressures and competition from these fintechs will accelerate moves towards Banking-as-a-Service (BaaS) and the migration of services to the cloud.

However, “successful [Baas] platforms are underpinned by robust IT architecture, something that traditional banks are struggling to build,” note the report’s authors. 

This may mean internal digital transformations come in parallel with the launch of digital-only subsidiaries. 

Profits secure

Fintechs’ impact on banking may be defined as a cultural shift rather than an existential threat, however. 

While JPMorgan Chase chief executive Jamie Dimon called FinTechs an “enormous competitive threat” to banks in April 2021, analysts at Credit Suisse wrote in a December report that “the near-term threat to incumbent banks from neobanks is still limited”.

Despite their significant cost advantage due to their modern tech stack and smaller operations, they face obstacles to creating a profitable revenue base from sources that are usually limited to credit revenues, interchange, subscription fees, marketplace revenues and banking as a service.

The most profitable have moved into SME lending, buy now pay later or BTL mortgages, the Credit Suisse analysts said. 

And “it is worth noting that if USPs remain the same, a trusted brand is likely to do better,” Sankar Krishnan of Capgemini noted. 

Nonetheless, the private market valuations of Fintechs have soared in recent years, off the back of strong global growth for firms such as Klarna and Revolut, and growth plus profitability for Tinkoff and Wise. 

Commercial bank changes

“Retail banking digital disruption has spilled over to commercial banks, as changing demographics fuel demand for seamless banking services,” the Capgemini report continues. 

Millennial entrepreneurs are now the most likely demographic to apply for funding, and these customers expect fast, simple but customised services, something they can find with new players such as Judo Bank and Starling Bank.  

According to Capgemini, more than 60% of commercial banks are turning to collaborations with fintechs and increased in-house investment to meet these demands.

Examples include Citigroup’s expanded partnership with customer verification platform Kyckr to increase the accuracy of its application processing, and Mauritius Commercial Bank’s work with Backbase to build a digital platform to reform SME user-journeys. 

Payment technology

Similarly, established payment service providers will be threatened by PayTech [payment technology] incumbents and the tech giants, according to the report.

Digital ID infrastructure will be a key theme as customers embrace next-generation payment methods – meaning a shift to instant and e-money payments through digital wallets over cash, cheques, direct debits and credit transfers. 

“Intense disintermediation is hitting incumbent profits,” the authors say, “while profitable PayTechs are riding the success of non-card profits and services.” 

“The clock is ticking for banks and traditional payment firms because competitive advantages don’t last forever.”

However, the drop in listed PayTech firms’ stock prices over the past year, such as Adyen (ADYEN) in the Netherlands, Affirm (AFRM) in the US, and India’s Paytm (PAYTM), shows there are challenges facing the challengers that investors should be wary about.

Wealth-management shifts

The Capgemini report also discusses changes in wealth-management firms, which it says will be investing in building better digital client experiences this year.

Demand for hybrid advice – part human, part automated – and for digital assets may require consolidation of business units and partnerships with other firms to gain a strategic advantage in a historically competitive industry, with large financial services firms focusing on wealth management and new digital players making inroads. 

Meanwhile, wealth managers will also need to bolster their ability to measure compliance with environmental, social and governance [ESG] standards to meet client demand, increasing their need for data and analytics capabilities. 

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