Fintech reaches tipping point for traditional banking

This week may have market the point where the significance of the fintech revolution in banking was finally acknowledged by the mainstream.

“Growth of fintech to spur almost 2m banking job cuts” read the front page of the Financial Times in response to the publication of a new report from Citigroup, Digital Disruption: How FinTech is Forcing Banking to a Tipping Point.

Certainly the potential of fintech to displace banking incumbents is a view shared by the capital markets. As the report states: “FinTech investments have grown exponentially in recent years: $19 billion of investment in 2015 was up two-thirds from $12 billion in 2014 and from low single-digit billions of dollars per year earlier in the decade.”

Yet, according to Citi’s own head of digital strategy, we are not even past the foothills. “Currently only about 1% of North America consumer banking revenue has migrated to new digital business models (either at new entrants or incumbents) but that this will increase to about 10% by 2020 and 17% by 2023.”

Contrast this, however, with China, where the market is “well past” the tipping point for disruption. The report sets out the reasons for this contrast.

“China’s e-commerce ecosystem is now larger than any other country in the world in terms of transaction volume. China’s top FinTech companies (such as Alipay or Tencent) often have as many, if not more, clients than the top banks… China’s FinTech companies have grown fast due to a combination of: (1) high national Internet and mobile penetration, (2) a large e-commerce system with domestic Internet companies focused on payments, (3) relatively unsophisticated incumbent consumer banking, and (4) accommodative regulations. While the US and Europe also share high mobile Internet savvy, their local Internet leaders have not as yet strategically focused on paymnets/finance and their local consumer banks are more sophisticated.”

Emerging markets are of course ripe for fintech penetration with “a high percentage of unbanked population, relatively weak consumer banks, and a high penetration of mobile phones.”
The extraordinary rise of mobile money in emerging markets is a major signifier of the power of technology to revolutionise banking.

“The recent mobile Internet and smartphone revolution has created a game changer in consumer and SME finance and payments. Smartphones in the US and Europe are increasingly part of the SME and micro-enterprise payment space (e.g. Square or iZettle) Apple Pay and Android Pay debuted in 2014 and 2015 respectively and allow consumers to make payments via phones, tables or watches. The original mobile devices based payment service, M-PESA, launched in Kenya as far back as 2007.”

But it is payments information in particular, once harnessed to big data engines, that promises rich revenue opportunities way beyond traditional payments processing fees.

And the data revolution is not just about generating customer offers related to historical payment patterns – it will revolutionise credit also. The report quotes JP Morgan CEO Jamie Dimon in his 2015 Annual Shareholder Letter: “Silicon Valley is coming. There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking, The ones you read about most are in the lending business, whereby firms can lend to individuals and small business very quickly and (these entities believe) effectively by using Big Data to enhance credit underwriting.”

The potential of the various parts of the banking pie from a fintech perspective is perhaps best gauged by the allocation of investment dollars.

Some 37% of Fintech capital deployed to date has been in the Personal or SME banking segments. Some 47% of that amount has been targeted at lending, 265 at payments and 10% at savings and investment.
According to Citi, however, not all fintech new entrants will have a sustainable competitive advantage. “Companies that are trying to solve a financial need in a different rather than simply a cheaper way are more likely to maintain their innovation edge for longer.”

Citi notes that while payments, personal financial management and lending are “leading the pack”, lending is “crossing from its consumer base to the first rung of corporate segments and small and medium sized enterprises.”

However, one thing we should remember, the report warns, is that “digital disruption will not discriminate. It is a pervasive technology that will eventually transform every business model for every product and every segment. While we may debate where it stats, the end-game is a lot clearer.”