Digital to determine winners
The widening application of digital innovations in financial services is placing a premium on efficiency and opening up competition that will continue to drive disruption across banking business segments, including payments, lending, capital markets and wealth management, says Moody’s Investors Service.
“How i ncumbent i nstitutions and new entrants harness these innovations will define the bank of the future. In the coming years, we expect the disruption and evolution of business models, financial infrastructure, product pricing models and profit margins to open a split in global banking leadership,” Moody’s said in a report titled “Fintech-Global: Bank of the Future: Innovative incumbents will thrive; laggards will be disrupted”.
Incumbent banks that aggressively pursue agile digital strategies will defend their core franchises, broaden their customer bases and improve efficiency, supporting their creditworthiness. Laggards will face increased customer attrition, reduced pricing power and uncompetitive cost structures, it said.
Agile incumbent banks that consistently assert digital leadership will thrive and prosper. These banks will pursue transformative digital strategies that drive: relentless investment in data analytics; the upgrade of core systems and cyberdefenses; ongoing innovation in product design, distribution and strategic marketing; and deliberate choices to cede ground to competitors in select markets where necessary, said Moody’s.
“We expect successful incumbents to achieve these ends both on their own and via acquisitions and partnerships with fintechs, ranging from niche new entrants to big tech firms,” the international credit agency said.
Laggard banks that lack the vision or resources to develop competitive digital strategies will be disrupted, it said. These firms will find themselves unable to deliver the quality of service or price competitiveness necessary to maintain their market share and revenue streams.
They will lose ground as more nimble peers poach clients, as new fintech entrants gain a foothold in low-efficiency banking service niches, and as big tech firms and digital challenger banks expand their suite of banking alternatives across markets, said Moody’s.
As the business activity and profit margins of laggard banks shrink, they may increase risk taking, consolidate business lines or, ultimately, be subsumed in larger or stronger firms.
The fintech effect will be far-reaching and global, but the type and degree of change will vary considerably by region, sub-sector and institution, said the report.