How FinTech is Forcing Banking to a Tipping Point
With advances in technology, the relationship that customers have with their bank and with their finances has changed. Customers rely less and less on walking into a branch for their banking needs, and instead have digital options to help them —ATMs, on-line chat, mobile phones, and Internet banking. So far these have been seen more as additive to a customer’s banking experience but when do we go over the digital disruption tipping point and see a change in the fundamental banking business?
Investments in financial technology have grown exponentially in the past decade — rising from $1.8 billion in 2010 to $19 billion in 2015 — with over 70% of this investment focusing on the “last mile” of user experience in the consumer space. The majority of this investment has also been concentrated in the payments area and this is where banks are seeing the most competition with new entrants. Competitors already established in new marketplaces, such as PayPal for e-commerce payments in the U.S., or emerging in client segments traditionally underserved by banks (such as micro and small businesses) are starting to gain traction and ramp up their scale.
Despite all of the investment and continuous speculation about banks facing extinction, only about 1% of North American consumer banking revenue has migrated to new digital models. Although FinTech companies have the advantage of new innovation, incumbent financial institutions still have the upper hand in terms of scale and we have not yet reached the tipping point of digital disruption in either the U.S. or Europe. Given the growth in FinTech investment, this isn’t likely to continue for long.
In China, Internet giants have moved into financial services and gained considerable market share in e-commerce and third-party payments. These new entrants were faster than the banks to offer convenient, reliable, fast and cost-efficient alternatives to traditional bank payments. China’s FinTech companies often have as many, if not more, clients than the top banks and their FinTech players often have well-resourced parent companies in e-commerce and finance that can sustain larger and more balance sheet intensive businesses that Western venture capital funded rivals.
As customers shift their behavior and move more towards digital solutions, banks will need to rethink their digital strategy. The authors believe an omni-channel strategy is the winning solution for incumbent banks over the next decade. This should be built around a competitive digital offering, a reduced and modernized branch network, and lastly, a targeted channel strategy for different segments of customers.
Authors: Ronit Ghose,Ashwin Shirvaikar, CFA,Keith Horowitz, CFA,Yafei Tian, CFA,Josh Levin, CFA,Simon Ho, CFA,Greg Baxter,Jonathan Larsen,Aditya Menon,