How the rise of fintech could affect your bank

written by Josh Beaird

"Fintech” has received a lot of attention lately, but many people are not sure exactly what it means. More importantly for a community banker, you may be wondering how it will impact your bank. What is Fintech? Financial technology is defined as “an economic industry composed of companies that use technology to make financial services more efficient.” More than 2,000 new fintech companies had launched by the end of last year, and fintech startups raised more than $20 billion in 2015 after raising $12 billion in 2014. Fintech services cover four general categories:

1. Savings and investments — Services include marketplace platforms for investments; online investment advice, budgeting and financial planning; and online trading. Firms in this space include Mint and Betterment.
2. Funds transfers and payments — Services include B2B and B2C funds transfers by non-banks, as well as online foreign exchange and overseas remittances. Firms in this space include Venmo and Square.
3. Lending — Services include marketplace lenders and peer-to-peer lending platforms. Firms in this space include OnDeck and LendingClub.
4. Insurance — Services include health and car insurance aggregators that use information technology to lower premiums. Firms in this space include Esurance.

There firms are using software and the Internet to disrupt existing, traditional financial institutions and infrastructure, which are reliant on legacy systems, that are often slow by comparison. In this environment, community banks need to give some serious thought to how they could be impacted by the ongoing evolution of the fintech industry. As you can see above, there is a fintech application for just about every traditional bank product and service. How does it impact the traditional bank? Researchers have projected that fintech could be responsible for a reduction of between 10% and 40% of bank revenue by 2025. It’s estimated that between 15% and 25% percent of U.S. banks could be gone by 2020 as a result of consolidation brought about largely by the rise of fintech and increased regulations on banks. However, McKinsey, a consultancy, analyzed the impact of fintech on retail banks from an opportunity standpoint. It determined that progressive banks can increase revenues from innovative new offers and business models by 5%; increase revenues from new products and distinctive digital sales by 10%; and lower operational costs through automation, digitization and transaction migration by 30%. This would result in a total potential net profit opportunity of +45 percent. To fully recognize these opportunities, community banks must evaluate their basic product and service channels in light of the new risk posed by fintech companies. This starts with the retail branch, which is the foundation of product and service delivery for most community banks today. The demise of the bank branch has been predicted since the 1990’s, as the internet continues to reach farther into our lives. However, we are nowhere close to a branch-less banking world today. Nevertheless, Bankrate’s Financial Security Index survey published last December found that four out of 10 customers had not visited a bank branch in the past six months. To maintain the relevance of branches, community banks should look for ways to make their branches more “user-friendly.” One example is the use of self-service financial kiosks instead of full-service branches. Another is turning branches into tech-savvy “financial centers” that can provide support when customers who prefer online or mobile banking need face-to-face interaction. Some industry sources and experts, including the 2016 Retail Banking Trends Digital Bank Report, have made a few predictions about how the rise of fintech could impact the traditional banking industry. Among them:

• With the “platformication” of banking, banks and fintech firms will partner together to leverage banks’ advantages of scale, stability, trust and access to capital and funding, and fintech firms’ agility, innovation, culture and technical expertise. As a result, banks will become the hub of distribution for a broader assortment of solutions.
• A move toward “optichannel” delivery will deliver solutions to customers using the best (or optimal) channel based on the customer’s needs and preferences.
• Banks will start to replicate some of the best characteristics of fintech companies — namely, innovation — to differentiate themselves while also leveraging their scale advantages.
• A new breed of banks sometimes referred to as “challenger banks” will start to emerge. These are banking organizations built from the ground up without needing to rely on another banking firm for back office support.

There’s little doubt that fintech is here to say. The only question is the degree to which it will impact traditional community banks. Start planning now for how your bank will adapt to the rise of the fintech industry. Contact us if you have questions about how the rise of fintech could impact your bank and what you can do prepare 417-881-0145.