The world’s top banks and insurers are seeing their business models challenged by “fintech” start-ups, which are reshaping what consumers and businesses expect from financial services, industry insiders and experts say.
A report out Tuesday from the World Economic Forum (WEF), the Swiss-based corporate think-tank which runs the Davos summit of world leaders, says major disruptions lie ahead for the once highly profitable financial services industry.
Foreshadowing the end of the friendly local bank manager, UK regulators last week granted a banking license to Atom, a “branch-free, paper-free” institution which its customers must on their own mobile phones or tablets.
The WEF study joins a flood of recent reports including one from Santander InnoVentures, the venture arm of Banco Santander, which argues digital technologies are eroding the bulwarks of the financial services industry, just as it did in travel and entertainment a decade or more ago.
Recent market entrants are taking advantage of the plummeting cost of cloud-computing capacity to go head-to-head with banks in terms of raw transaction and data-crunching analytical power, what Santander’s study has dubbed Fintech 2.0.
“Pre-digital business models and processes will be rendered obsolete, and billions of dollars of value will shift to ‘new model’ suppliers,” the Santander report predicts.
Rising investments in fintech start-ups globally are fuelling the challenge to entrenched players, with $12.2 billion plowed into such ventures last year, more than threefold the total of 2013, according to data supplied by research firm CB Insights.
BANKS WITH NO BRICKS
The generation born after 1980 have largely abandoned bank branches already. Younger people turn instead to virtual fintech brands such as eToro for social-media style investing, Moven in mobile banking, Prosper for loans and a growing number of crowd-funding platforms to finance projects.
“Bankers always claim that they are close to their customers because they have all these retail branches,” Berlin fintech entrepreneur Valentin Stalf said in an interview. “I think branches are holding banks back from reaching their customers.”
Stalf, 29, is co-founder and chief executive of Number26, a financial services marketplace for mobile users in the German-speaking world that has received backing from top Silicon Valley investor Peter Thiel, among other investors.
“I don’t see banks at all as my competitors,” Number26 CEO Stalf says. “They just can’t move fast enough.”
Bankers who once thought financial regulation was a barrier to new entrants are seeing non-bank fintech rivals go after their most profitable markets, while avoiding regulated pieces of business, said Huw van Steenis, head of European bank research at Morgan Stanley, who contributed to the WEF report.
While challenges to banking are more imminent, insurers may face bigger threats in the long-run as troves of online data usher in new types of personalized health, life and drivers insurance, upending the model of mutualized financial risk that has been at the heart of the industry, the WEF report predicts.
In investment management, “robo-advisors” have begun to automate wealth advisory roles, calling into question face-to-face meetings and proprietary distribution channels. Meanwhile, robo-lenders threaten to eat banks’ lunch.
Most of new fintech firms selectively partner with technology providers who possess their own banking licenses, rather than waiting to procure banking licenses in country after country. They partner and outsource much of the underlying technology they use, slashing costs, while boosting flexibility.
A complication of the exploding number of lending platforms is that it is becoming harder for banks or credit card firms to get a comprehensive view of creditworthiness.
Both reports still see life ahead for major financial service brands, but not as universal, full-service banks or insurers. Instead they predict an era of growing specialization while relying online partnerships to deliver non-core services.
Incumbents are learning new tricks from challengers, adapting existing services to make them convenient for customers and finding ways to collaborate with new fintech players, leading industry dividing lines to blur, both studies agree.