Global banks better buckle up with modern techniques
The banking industry across the world has no choice but to adapt their business models to the disruption caused by the financial technology (fintech) revolution that could see the incumbent banks losing market shares to technology innovators, at least in some segments of business, Ronit Ghose, managing director of Global Banks Citi Research, said in an interview.
"The pace of disruption in the financial industry could accelerate as the market share of fintech companies reaches critical mass. Banks need to get innovation before fintech companies get distribution. Otherwise, considerable share shift is ahead," he said
Relative to other industries such as the media, music and travel where digital new entrants gained significant market share of up to about 45 per cent over a decade, the banking industry is still at an early stage for digital disruption. An estimated 1 per cent of the US consumer banking industry has been disrupted by fintech today but this could rise to 15-20 per cent by 2020.
The global banking industry currently spends $500 billion (Dh1.83 trillion) on technology. Most of the bank's technology spending is focused on a business as usual approach such as updating legacy systems and back office solutions. The fintech disruption is changing the way banks are spending money on technology to transform the way they do business.
"One of the reasons for this is that there are huge investments happening in fintech, funded through venture capitalists (VC) and private equity. Last year alone, $20 billion was invested in fintech companies through VC funds. The new generation fintech companies are clearly looking at taking business away from banks," said Ghose.
Conventional banking's value chain essentially involves functions such as taking savings, providing loans and facilitating payments. In this value chain, at the most risk of disruption is the payments business model because it is the least capital intensive and most tech intensive.
While savings and lending involve the balance sheet and regulation, in the case of payments, business is balance sheet-light and regulations are relatively lower, attracting most innovators to this segment.
Fintech has already become a major player in the payments industry in China. There, all online payment companies and fintech companies have all the advantages of incumbent companies in the West. For example Alipay in China has done three times more transactions than PayPal because Alibaba has more online trans- actions. It clearly shows that once that ecosystem takes off, it is very easy for fintech to grow.
Although a disruption is happening in most of the markets around the world in the payment industry, the extent of disruption is much less than what is happening in China. In lending and savings, the impact of disruption has been slower compared to payments. Although peer-to-peer lending is already catching up, market share is minimum and there are still questions on the model's sustainability when it faces the extremes of credit cycles.
"The value add [ons] of fintech companies are efficiency, simplicity and transparency. Equally, fintech grows as it often targets a client base under- or unserved by banks, such as payment services for sole traders or microenterprises. However, the recent decline in P2P lender share prices highlights caution over new entrants' credit and rate cycle resilience," Ghose said.
Banks are likely to remain relevant as most of the fintech companies still rely on existing banking infrastructure. But banks are at risk of being disintermediated from some customers and becoming commoditised infrastructure providers. Digital banking works well in societies where there is very high level of digitisation. The UAE in general is very urbanised with elevated high-tech penetration.
"With a high proportion of transient population, there is a lot of money moving in and out of the country in terms of remittances and payments. This gives huge opportunities for banks to grow and retain business. Additionally, there are segments of market which are not cost efficient to service through branch networks. In such scenarios fintech solutions are ideal," Ghose said.