In an era where digitatization is key for a successful business, banks are facing a serious problem. Their softwares are outdated and cost ineffective. In 2015, banks spent USD 196.7 billion on IT from which more than three quarter went into maintaining their system. They are built on decade old softwares that were complemented by add-ons throughout the years. This issue is allowing new players to come in, making the financial landscape more competitive than ever, and jeopardizing the status of banks as the primary source of financial services.
Fintech startups, digital challengers and tech giants are threats that they can no longer afford to underestimate as they are taking over the main branches of banking services; payment system and loan origination & investment.
Transferring money and payment made easier for everyone
Companies whose business model is based on subscription are benefitting from new direct debit softwares which create a win-win scenario for the customer and the company as it uses your IBAN and not card details. Indeed it means less worry about expiry dates, payment limits and card theft/lost affecting the collection of the payment as well as lower fees and an increase in customer fidelity. Slimpay, a French Fintech startup has been ranked 1st in the “Deloitte Technology Fast 50” in 2015 showing great promise for the future with its user friendly and easy to integrate into a website offer.
Following their direct debit strategy other companies have seen the light such as Pumpkin and Lydia; which allow transferring small amount of money between users. In a society where smart phone users are increasing exponentially it is essential to offer apps which are useful in everyday situations. Hugo Salle de Chou, co-founder of Pumpkin, explains “it’s often complicated to reimburse a meal or a concert ticket to a friend as you don’t always carry cash with you. However you always have your mobile”.
In the same spirit, group outings or gifts can be a hassle to organize budget wise, if you rely solely on bank transfers. Creating online money collection eliminates the problem as it gathers all the payments to allow one single transfer, making it time efficient and traceable. This technique was quickly used to accommodate crowd funding. It gave the freedom to put the amount you could and wanted into a project with a friendly user experience.
Banks have made it very costly for companies to have Chip Card Reader. The high fees they incur usually have to be balanced by a minimum payment often too important to be interesting for a customer thus leading to a failed sale. Tech giants have taken advantage of the situation for our benefit by offering cheap devices that allow anyone to accept card payment with the help of a simple app. Square, PayPal Chip Card Reader, QuickBooks GoPayment, and PayAnywhere are among the best credit card readers for 2016
Taking over the loan origination
Following the 2008 financial crisis banks have had a reduced lending capacity. In addition, the implementation of Basel III imposed a punitive cost of capital on banks for lending to Small Medium Enterprises. These measures as well as very low interest rates encouraged investors to look for new opportunities such as direct lending.
Fintechs are now redefining the operational framework of the lending market with a much lower cost than banks. Since 2009 there has been a dramatic increase in loan origination via marketplace finance platforms (peer-to-peer) in Europe and the US. In 2015, 15.6€ billion were issued in peer-to-peer loans of which 26% have been originated in Europe. Industry specialists expect this market to grow to 53€ billion by 2017. In the United Kingdom more than 94 platforms are operating originating 86% of the European market.
The low interest rates, multitude of products and more importantly the fast pace of the process makes these platforms more competitive than any bank however these are mainly unsecured loans meaning that the risks are high on both ends; the investor’s and the borrower
2016 and onward
The Boston Consulting Group stated that “enormous opportunity exists from the collaboration of established capital markets players such as investment banks with young Fintech companies, but the potential is far from being realized”.
The next move for banks if they want to stay major players is to back up financially the Fintech start-ups which will then lead to collaboration between the two. By working together they will be able to improve customer satisfaction as well as develop a new business model.
Digital disruption of banks’ business model is the key to becoming essential to the everyday life of institutions and individuals. Embracing innovation and collaboration is the only way to stay relevant and grow.