Fintechs, challenger banks and tech companies trying to disrupt financial services certainly have made their presence felt.
A Googling of the word “fintech” yields 61.5 million results. Celebrities including Jared Leto, Snoop Dogg, MC Hammer and Ashton Kutcher are among those who have invested in fintech companies.
But from a coldly analytical point of view, where are the fintechs and challenger banks making a dent in financial services?
Domination in a decade?
A recent Gartner report makes this prediction: “By 2030, only 20% of heritage financial firms will flourish and win. Eighty percent will cease to exist, become commoditized or achieve zombie status.”
Zombie status means existing, but not competing effectively.
“Like zombies, they’re still moving, but they’re not really alive,” said Peter Redshaw, practice vice president at Gartner.
“Heritage firms that do adapt can survive,” he said. “It’s the ones that fail to make any serious moves” will die out.
The report explains that in a recent Gartner survey, 71% of financial services CEOs said they believe their organizations can compete in a digital world without changing their business model. These CEOs apparently think they are safe because few of the digital-only banks have scaled up or become highly profitable.
“This attitude is dangerous because it underestimates the degree of change that digital technology will bring to the industry,” the Gartner analysts said in their report.
Gartner’s forecast caused a stir on Twitter.
“If I were CEO of JPMC, I'd buy Gartner, shut it down, call that analyst into my office and say: ‘Who's out of business and irrelevant now, sucker!?’ ” Cornerstone analyst Ron Shevlin posted.
Another person Tweeted “Rubbish” in reaction to Gartner’s prediction. Others used stronger language.
In an interview, Asheet Mehta, senior partner at McKinsey, also took issue with Gartner’s prediction. McKinsey,
“If you were to go out the next five years, we don’t see that happening,” he said.
He pointed out that the big banks have scale, which becomes more important as technology, data and transparency play a bigger role in financial services.
“It’s easy to enter the financial services market because of technology and data availability, at the same time in certain segments, scale is becoming so much more important that you’re seeing the large get larger,” Mehta said.
In trading, for example, large financial institutions have value as partners.
“You can do a small trade with any bank, but when you want a large trade, you need a large bank on the other side of counterparty to provide liquidity and other things,” he said. “That’s difficult for a smaller player to do. Because you know you need that, you have to use the big banks for other business. You can’t just go to them for the large trades.”
Warren Kornfeld, senior vice president at Moody’s Investors Service, was more sympathetic to Gartner’s projections.
“There will be massive consolidation,” he said. “We all know there are far too many banks, far too much capacity, and the number of banks will continue to shrink at a faster pace. Technology is going to do this. Whether it’s 80% or 60%, I don’t disagree there will be sizable decrease.”
He also thinks some of this will simply be consolidation caused by mergers, as midsize banks and CUs strive to get bigger.
Lost market share
Accenture estimates that fintechs and challengers have already taken between 3% and 4% of market share away from traditional FIs in certain segments.
“That follows a very typical attacker strategy,” said Peter Sidebottom, lead in North America banking and capital markets strategy for Accenture. “Which is not to cut across all the waterfront but to pick particular niches and go from there. I’m sure when Amazon started, there wasn’t anybody who thought they were a threat to them, including Walmart, and now look at the newer categories they’re in.”
In commercial lending, money is flowing to alternative providers, Sidebottom observed. Private-equity firms are funding companies' equipment leasing and new buildings, for example.
On the consumer banking side, banks and credit unions may not have lost vast amounts of assets yet. But growth in new consumer accounts is going to digitally enabled leaders, he said.
“There are a number of institutions in the U.S. that are largely at a standstill,” Sidebottom said. “They’re not growing consumer accounts. And there are institutions that are investing heavily in digital that are growing accounts and households.”
Personal lending, student lending and
“It’s the niches where banks have stepped back and decided these markets are not super profitable and where emerging fintechs have been able to feed a demand and have a much stronger user interface and understand the needs of the borrower and try to address them,” Kornfeld said.
Banks such as
The personal loan market is estimated at about $120 billion.
“A not insignificant portion of those are nontraditional lenders,” Kornfeld said.
Though credit card debt is at a healthy $800 billion, according to McKinsey, it has not been growing at the rate it used to. It once was the second-largest asset class in the U.S. after mortgages, which are at around $10 trillion. It’s now the fourth-largest asset class, one spot behind auto lending, which is more than $1 trillion outstanding.
One reason for this is some consumers have refinanced their credit card debt with online lenders.
Mortgage origination is another area where fintechs and challengers have done well, especially Quicken with its Rocket Mortgage. Earlier this year, Quicken became the market share leader in U.S. mortgage originations.
Kornfeld said banks have deliberately stepped back from mortgages because they are only “modestly profitable” and they can make more money other ways.
Smaller margins
Mehta does not see traditional FIs losing market share to fintechs and other challengers entering financial services, but he does see those challengers putting pressure on banks’ margins — especially in products where it is easy to compare prices.
One example is in asset management. About 45% of asset management today is passive money going into exchange-traded funds. This is up from 12% in 1998, according to McKinsey. The ETFs charge less than 20 basis points; some charge 6 points or less. Active equity funds typically charge 100-150 basis points.
In savings accounts and CDs, about $30 billion has moved from low-rate bank accounts to higher-rate accounts at disruptors, Mehta said.
“It’s not a big number per se, but it is a number,” he said. “And younger clients who are more digital-only are turning out to be less loyal. If they see a better rate or a better offer, they will move. As deposits leave banks, they will have to price up deposits to keep them at some point.”
Big-tech threat
Kornfeld sees the biggest threat coming from tech giants like Amazon.
“The bigger fear of real displacement comes from big tech where they already have the consumers, the merchants, the brand — they have more currency than the incumbents have, they have market cap, and they’re larger than the incumbents,” Kornfeld said. “That’s why those entities are the ones that are going to have the potential to be so disruptive.”
Mehta does not think tech companies will want to become banks and comply with bank regulations.
“The cost of becoming a regulated bank holding company is quite problematic,” he said.
He does see tech companies becoming an important distribution channel for products like mortgages and mutual funds. And he sees more tech companies accepting payments on the front end of the customer journey, the way Amazon has Amazon payments and Apple and Google have mobile wallets.
“You could also see some financing or lending being integrated with that — that is already happening,” Mehta said. “But it’s hard to see a significant move outside that, other than as a distributor of financial services products.”
Accenture suggests that for the next dozen years, the biggest challenge for traditional financial institutions will be changing their approach by going truly digital and investing in growth efforts that can help them escape the squeeze of new competition and deteriorating returns.
“Most banks struggle to find the right mix of digital investment,” Sidebottom said. “To remain relevant, traditional banks will need to continue to address changing customer needs, exploit new technologies to reduce costs and increase speed to market for new products, and choose a business model that is best suited to their strengths.”
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