Fintech a $US1 trillion fight
Consultants Oliver Wyman has been talking to banking clients all around the world over the past few months about the concept of “modular financial services”. It’s the coverline adorning one of the firm’s latest research pieces on the impact of information technology on the future of banking.
Even as the equity prices of US fintech poster children like Lending Club and OnDeck are pummelled as capital markets reassess valuations, incumbent banks around the world show no sign of losing interest in fintech. Indeed, if the interim results of three of Australia’s big four banks last week were any guide, thinking about fintech in the C-suite is only accelerating.
The earnings results last week also showed that Commonwealth Bank of Australia has lost its competitive advantage in terms of talking about its technological prowess. Westpac Banking Corp, ANZ Banking Group and National Australia Bank are all now touting their technological wherewithal with increasing confidence.
Fintech has become ingrained in the strategic thinking of global banks because it is both a disruptive threat and an opportunity to enhance customer service and reduce costs. If last week’s results were any guide, Australian incumbents are growing in confidence about their ability to repel any competitive threat in the knowledge they have two things that most fintechs lack: millions of customers, and deep pockets with which to invest.
Banks’ response to fintech is not a surprise given how much could be at stake. Oliver Wyman estimates that for a global banking industry generating $US5.7 trillion of revenue today, around $US1 trillion of revenue and costs could be reallocated by fintech disruption.
To wrap your head around Oliver Wyman’s concept of “modular finance”, think of a vertically integrated banking stack, where a bank provides a variety of financial services. In the digital future, might this stack be unbundled by a plethora of fintechs appealing to millennials by offering services at various niche levels? A big bank customer might use it today for a transaction account, a mortgage, a credit card, and perhaps financial advice or super and insurance as well. But in the future, will millennial customers have transaction accounts with an established bank but do a whole manner of other financial services – such as foreign exchange, insurance, microfinance investment, borrowing or payments – with a variety of different fintech companies offering a better digital experience?
Supporting its thesis of this modular future, Oliver Wyman says new technology is making it easier for customers to buy from multiple product providers, meaning the number of financial products used by the average customer in the digital world is increasing. Banks are also using more third party suppliers of specialist services. Distribution of financial products will increasingly become dominated by digital “platforms” that can steer demand to any supplier, allowing new product providers to proliferate. Meanwhile, regulatory changes around customer data will weaken banks’ grip on their customers.
But modular financial services is not all bad news for banks. Fintech provides a pathway to a lower-cost future, and will become a new lever for banks to pull to offset pressures on return on equity. Oliver Wyman says: “It will allow them to develop new services for customers, build cheaper and more flexible back offices and use capital more efficiently.”