Battle with fintech could be bruising for big banks

Fintech is alive and well around the world doing its better to disrupt existing financial relationships by using technology. In Canada, fintech continues to be a lesser factor, in part because the local banks emerged in better shape after the global financial trouble and because banks have a higher-level of satisfaction with their customers than in other markets.

Those, in a nutshell, were the key points to emerge from a current report prepared by analysts at Canaccord Genuity, which, because of where it operates could bring a worldwide perspective to fintech. With offices in Canada, U.S., the U.K. and Australia, Canaccord was at a favourable position to discuss new entrants to the world of emerging financial technology – and also the results which have been achieved.

“The U.K. appears to have seen probably the most disruption given a high proportion of GDP associated with the industry, growing government support for financial technology and better customer dissatisfaction with incumbents,” said the 34-page are convinced that drew around the input of eleven of the firm’s analysts.

The report added the U.S. market – because of entities for example PayPal and Apple C is “highly disrupted” as the Canadian and Australian markets, fintech has already established a “relatively low impact as yet and would prosper to observe the U.K. market.”

One measure of those regional differences: Research by Ernst & Young, established that while 15.5 percent of “digitally active consumers” had used a minimum of two fintech products over the previous six months, the comparable figure for Hong Kong and Canada was 29 per cent and eight percent respectively.

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Of course what’s going to emerge out of the meeting of traditional banking institutions (which spend more than US$200 billion annually) and the digital competitors (who seem to have few problems in attracting investors including US$14 billion within the last 12 months) is tough to predict: while the newcomers are a threat, the banks may opt to “cherry pick” the successful companies “as an alternative for internal R&D in the same manner they adapted to phone an internet-based banking.”

In Canada types of that trend include: Scotiabank’s acquisition of the internet bank ING Bank; VanCity Savings’ purchase of Citizens Bank; and CIBC’s purchase of First Line Trust.

And whether or not the fintech companies don’t win the war the battle could be bruising for that banks. “We believe [the new entrants] will probably selectively concentrate on the most profitable and least regulated pieces of the business where the customer experience is easily the most challenged,” states the report, noting that such competition “will lower profitability for all players, including the banks.”

How could that actually work? The report argues the newcomers, will “unbundle the more profitable, underserved, or less regulated pieces of the business and skim the cream,” with payments, online lending, and cross-border transactions “being the most exposed.”

As well, the report notes fintech companies “will have the ability to weather failure easier without string brands to safeguard,” because they can “pivot quickly.” Finally the new entrants “will offer freemium items that will make it hard for banks to charge fees for plain vanilla products.”

The report draws on surveys that demonstrate customers “are increasingly unhappy using their bank,” because the providers’ focus – increased fees and reduced core services – would be a sign that they were losing touch.

bcritchley@nationalpost.com