Fintechs have not made the inroads into banks’ markets and profitability that some had feared, because banks have done a good job of quickly adopting technology that consumers want, according to a recent report by Deloitte and the World Economic Forum.

But while they have not changed the competitive landscape, the fintechs have changed the basis of competition, according to the report, Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services.

Banks might have appeared vulnerable to the threat from fintech because they met the three criteria for disrupted industries – a large profit pool, customer friction, and technological developments providing opportunities for new entrants.

However, in financial services there were issues that prevented new entrants challenging the incumbents, says Arthur Calipo, Financial Services Lead Partner at Deloitte in Australia. Firstly, the high degree of regulation of financial services gave a significant amount of protection to existing institutions, he says.

Secondly, customer willingness to switch away from incumbents has been overestimated. “Customer switching costs are high, and new innovations are often not sufficiently material to warrant the shift to a new provider, especially as incumbents adapt,” the report states.

And fintechs have struggled to create new infrastructure and establish new financial services ecosystems, such as alternative payment rails or alternative capital markets. “They have been much more successful in making improvements within traditional ecosystems and infrastructure,” according to the report.

Calipo says banks responded much earlier than other industries to the advance of technology by making investments and forming alliances and partnerships to build their own capabilities.

Yet while the fintechs haven’t yet changed the competitive landscape – in Australia for instance, the Big Four banks remain the market leaders – they are starting to change the basis of competition.
Fintechs have reshaped customer expectations, setting new and higher bars for user experience

Aggregators could take customers

They are defining the direction, shape and pace of innovation across almost every subsector of financial services, the report states.

“Fintechs have reshaped customer expectations, setting new and higher bars for user experience. Through innovations like rapid loan adjudication fintechs have shown that the customer experience bar set by large technology firms, such as Apple and Google, can be met in financial services.”

Customers are unlikely to switch to purely fintech financial institutions, but could switch to aggregators, such as Monzo in the UK, says Calipo.

Monzo calls itself “the bank of the future” and interacts with customers via their smartphones. Its founder Tom Blomfield says the bank is more like a marketplace or an app store, where customers can get the best price from a range of financial institutions.

In Australia, Douugh, provides a similar service.

Aggregators present the biggest risk to the banks because, firstly, the aggregators could derail some profit segments, such as taking credit card issuance away from banks. Secondly, there is the risk of losing customer ownership.

“Who is going to own that interface with the customer because the new generation will want a very different experience. They want to have products for different providers, they are not looking for a one-stop shop anymore, not at least from a pure provider, manufacturing perspective,” Calipo says.

“The risk for the banks is that they become just manufacturers of financial products.”
In the UK, the open banking initiative that forces banks to share their customer data with their customers has facilitated aggregators like Monzo.

The Australian government plans to introduce a similar regime and Treasury is currently examining what data should be shared and how the initiative can be best implemented.
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