The Bank of England (BofE) published its 2017 bank stress test results on Tuesday. Stress tests are hypothetical scenarios devised to ensure that major banks can withstand an adverse turn in the economic environment.
Although this marked the first year that all participating institutions passed the test, the BofE found that incumbents are probably drastically underestimating the impact that increased fintech competition could have on their profitability.
These are some of the ways the BofE says fintech’s rise could hurt incumbent UK banks:
- Diminish revenue from overdraft products. Currently, overdraft products — more specifically, unarranged overdraft fees — are one of the biggest contributors to UK banks’ annual pretax profits. However, fintechs like personal finance managementservices will help people better manage their money to avoid becoming overdrawn, and players like aggregation platforms will increasingly redirect customers to cheaper credit options, diminishing their need for overdraft facilities and reducing banks’ returns on such products, the BofE points out. Banks may be doubly hit if the Financial Conduct Authority (FCA) decides to impose a strict price cap on the overdraft fees banks can charge customers, following its ongoing review into the matter.
- Make customer retention and cross-selling more challenging. With the advent of laws that will mandate big banks to share their customer data with third parties, banks will face a much higher risk of disintermediation. Since fintechs offer consumers more intuitive tools for managing their finances, this could minimize customers’ engagement with their bank. Customer loyalty would thus be eroded, making it harder for incumbent to cross-sell products to clients, and pushing them to up their marketing spend to retain users. In turn, this could severely dent annual profits, the report says. It’s worth bearing in mind that these stress tests don’t include the potential future impact of tech giants like Google entering financial services, which could further hurt banks.
- Increase vulnerability to cyberattacks. As consumers increasingly manage their financial lives online, and as data-sharing regulations lead to consumers’ personal details being more widely disseminated, this could create more weak spots for cybercriminals to exploit. While the BofE notes that the UK’s major banks did account for increased cybersecurity spending in their 2017 stress test submissions, it says that they are probably underestimating the rise. Doubling their cybersecurity spending by 2023 would blow a £0.7 billion ($0.9 billion) hole in banks’ annual pretax profits, the BofE projects. Given the frequency with which data breaches at financial institutions (FIs) have been happening of late, it seems likely banks will have to round their security spending estimates up rather than down.
Interestingly, these risks stem not from direct fintech competition, but from its broader influence on the economy. When the fintech industry first began its ascent in earnest circa 2012, many incumbent FIs’ knee-jerk reaction was to be afraid startups had come to eat their lunch. Since then, although some startups did indeed opt to become direct competitors to FIs, a larger proportion have chosen more collaborative and enabling strategies, including partnering with incumbents and serving as technology suppliers to them. This may have caused incumbents’ concerns to abate.
However, the risks highlighted in this latest report come not from fintechs deliberately aiming to poach clients from banks, but from the way they’re changing the economy in which both startups and incumbents operate — including by facilitating more data sharing and moving operations increasingly online. As these shifts now seem irreversible, the BofE’s list is a timely warning that banks will have to adapt their business models more fundamentally to stay relevant in this changing landscape.
Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider’s premium research service, has put together a report that compiles various fintech snapshots, which together highlight the global spread of fintech, and show where governments and regulatory bodies are shaping the development of national fintech industries. Each provides an overview of the fintech industry in a particular country or state in Asia or Europe, and details what is contributing to, or hindering its further development. We also include notable fintechs in each geography, and discuss what the opportunities or challenges are for that particular domestic industry.
In full, the report:
- Explores the fintech industry in six countries or states, and identifies individual fintech hubs.
- Highlights successful fintechs in each region.
- Outlines the challenges and opportunities each country or state faces.
- Gives insight into the future of the global fintech industry.
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