By now, you’ve probably heard the term “fintech,” but you might not be sure exactly what it means. Or more importantly, you might be wondering what impact fintech might have on the traditional community banking industry.
What Exactly is Fintech?
Financial technology — or “fintech” for short — is defined by Wikipedia 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.
The services delivered by fintech companies fall into four broad categories:
- Savings and investments — These services include marketplace platforms for investments; online investment advice, budgeting and financial planning; and online trading.
- Funds transfers and payments — These services include B2B and B2C funds transfers by non-banks, as well as online foreign exchange and overseas remittances.
- Lending — This includes marketplace lenders and peer-to-peer lending platforms.
- Insurance — This includes health and car insurance aggregators that use information technology to lower premiums.
Fintech companies are making inroads throughout the financial services marketplace — from marketplace lenders like OnDeck and CAN Capital to robo-advisors like Betterment and Wealthfront and payment processors like Square and iZettle. In doing so, they are using software and the Internet to try to disrupt existing, traditional financial institutions and infrastructure that are reliant on legacy distribution and processing systems that are often slow and cumbersome by comparison.
In this environment, forward-looking community banks need to give some serious thought to how they could be impacted by the ongoing evolution of the fintech industry. Today, there is a fintech application for virtually every traditional bank product and service — yet the fintch companies usually offer them faster and cheaper than banks do.
Financial Impact of Fintech
Researchers have projected that fintech could be responsible for a reduction of between 10 percent and 40 percent of bank revenue by 2025. It’s estimated that between 15 percent 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.
According to analysis from McKinsey, innovative new product and service offerings by fintech competitors could reduce retail banks’ net profits by 13 percent, compress margins by 16 percent, and increase operational risk by 6 percent for a total potential net profit threat of -35 percent.
McKinsey also analyzed the impact of fintech on retail banks from an opportunity standpoint. It determined that banks can increase revenues from innovative new offers and business models by 5 percent; increase revenues from new products and distinctive digital sales by 10 percent; and lower operational costs through automation, digitization and transaction migration by 30 percent. This would result in a total potential net profit opportunity of +45 percent.
To realize these profit opportunities, community banks must reexamine their basic product and service delivery and distribution channels in light of the new threat posed by fintech companies. This starts with the retail bank branch, which is the foundation of product and service delivery for most community banks today.
The demise of the bank branch has been predicted every since the Internet exploded onto the scene nearly two decades ago. Obviously, we’re nowhere close to a branch-less banking world now. However, Bankrate’s Financial Security Index survey published last December found that four out of 10 customers hadn’t visited a bank branch in the past six months.
Given the fact that most customers still want access to bank branches, community banks should look for ways to make their branches more efficient and cost-effective. 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.
Fintech and Banks
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.
Impact of Fintech: Snapshots
To grasp the impact that fintech is having on the financial services industry, consider what each of these major fintech players accomplishes every hour of the day:
- LendingClub: Loans $757,000
- Xoom: Transfers out $787,000
- PayPal: Processes $28.43 million in payments
- Betterment: Handles investments for 16 people
- Zuora: Handles $4.8 million in invoice volume
Mobile: A Hot Fintech Segment
Mobile banking is an especially hot segment of fintech. One out of every three online adults (36 percent) now uses mobile banking, up from just 13 percent in 2011. Over half of mobile banking users with smartphones (54 percent) said that the mobile channel is one of the three most important ways they interact with their bank.
According to SNL, the most popular mobile payment activities are:
- Paying bills
- Making retail purchases by waving or tapping a mobile phone
- Sending money to and receiving money from friends
- Collecting and using reward points