Traditional Banks vs Fintechs – The Threat to Financial System Dominance

The world is currently undergoing what one might describe as a temporary phase of panoramic confusion. Whilst some profess that globalisation is the dominant trend obviously triggered by the tectonic phase of technological advancement, others will bring to fore the re-emergence of nationalism spearheaded by the U.S. under its current republican leadership, Brexit and other recent events as seen in Scotland, Greece, Spain and others over the last decade. 

Question could then be how is the world undergoing globalisation when countries are actually trying to win back their jobs, pull back their capital and dowse international trade through trade wars where trade tariffs are the principal weapon of economic value destruction? The answer would obviously lie somewhere within the correlation between technology and politics.

Focusing on the former, one of the key traditional roles of commercial banks has always been to facilitate trade through payments infrastructure either in the form of funds transfer, Letters of Credit, remittances, etc. Recent developments have shown that “Fintechs” are strongly vying to usurp this role from banks.

The other day, I walked into one of the London offices of an international bank to make a transfer. The requirements were cumbersome with all sorts of bank identifier codes and so many other information requested. Irony was that even though I was able to provide the information required, the bank was still unable to honour my instructions without making more and more referrals. Even if they were going to honour my request, indication was that it would take the best part of 72 hours to confirm payment. After spending close to an hour in the bank and getting nowhere, I was asked to return the following day when their funds transfer “expert” would be available. After all the huff n puff, I was fed up and decided I would simply wait to find someone travelling back home.

A few days later, I ran my predicament through a friend and she told me about an app called World Remit. She didn’t stop there. She reeled out so many options that I was soon spoilt for choice. To cut a long story short, I went about downloading the app she suggested, skimmed through their easy to follow registration process and did my first transfer. Within seconds I had confirmation of funds delivered! Few days later, they requested some additional documents to verify my identity. I uploaded these documents using my phone. No discussions, no direct human interface. Problem solved.

From Transfer Wise to Revolut, From Starling Bank to Monzo; From Tesco Bank to Virgin Money, fintechs are offering fast and convenient money transfer, currency conversion and other financial services that some of the largest commercial banks in the world still find quite challenging. Moreso, these fintech firms are licenced by the same regulators who regulate the large banks and are set up under simple venture capitalist arrangements. How are they are able to offer services that banks which have been in operation for decades find arduous? Simple answer: technology.

The term fintech (Financial Technology) refers to software and other modern technologies used by businesses that provide automated financial services.

The high-pace modern way of life especially amongst the millennials means banking and other financial transactions can no longer occur the way they used to. Today’s tech-savvy customers, especially the millennials expect money transfer, lending, loan management and investing to be done with minimal effort and maximum speed. No matter how complex the transaction is the payment process should not exceed pushing a few buttons on a keypad, swiping, tapping a card against a console, speaking to a voice recognition robot or scanning a series of barcodes. They expect security of financial transactions and all this without their physical presence at a boring old-fashioned banking hall. The idea of virtual money has largely dominated the modern mind. From payday to “brokeday”, they don’t necessarily see the need to handle physical cash. “Tap and go” is the trending phrase in the financial world these days.

In today’s world, the primary means by which people access the internet to make use of financial services is the smartphone equipped with mobile banking apps and digital wallets such as Google Wallet and Apple Pay. Apart from making banking more accessible and rapid, the technological innovations influence reach is very broad.

What are Challenger banks?
Fintechs also go under the name “Challenger banks”. Challenger banks first made in-roads with consumers who lost faith with institutional firms following the global financial crisis. They are recently emerging small retail focused banks first established in the UK that compete directly with the longer-established banks in the country, usually specialising in areas underserved by the bigger banks. The unique difference between these banks and the older banks is the level of technology deployed. Most of the Challenger banks use online-only operations with no brick-and-mortar presence. 

In short, they exist solely as an app on your mobile device to carry around in your pocket or handbag. The most interesting aspect of the entire system of operation is that some of these banks, or apps (if you may) feed off the database of the larger banks for client data and records in the form of account balance, card details, identity, etc. This information is used in providing faster and more efficient service usually in the area of international funds transfer, foreign exchange, retail payments and the likes.

Other Challenger banks have developed products via application program interface (API) integrations with other Fintechs thus enabling them make in-roads into the hugely untapped retail client base. Their model is not to target single large ticket deals, but more of several volumes of common day-to-day transactions that are easily processed through the effective use of technology.

In the area of foreign exchange, it will amaze you that these apps provide technology that offers live rates (on-line; real time) for instantaneous currency conversions with no “padding” whilst charging small amounts in return for their service. Delayed batch processing of client currency conversions make it difficult for traditional banks to match this service thus making them pad their rates in order to manage the currency price fluctuation risk that exists due to delayed cover of FX exposure.  

It is noteworthy that most of these so-called Challenger banks got licenced post the 2008 global financial crisis which triggered a wide-spread distrust of the traditional banking system. Their strategy of existence and operations focused on technology thus helping them avoid the huge costs and complexities of setting up traditional banks. Although technology does not come cheap, accounting principles allow for amortization of tech related start-up costs whilst regulation also allows for exemption from payment of bank levy due to their balance sheet size, which the traditional banks are required to pay.

Perhaps the biggest thing going for the fintechs is transparency. Don’t the regulators just love transparency? For one, it makes tracing and solving of financial crime easier since every online transaction leaves a trail and sufficient details from location to amount spent, paid or converted and actual date and time of transaction. Secondly, it makes the taxman’s job much easier as he analyses tax returns. Every transaction is nicely displayed, unlike cash transactions that easily conceal criminal activities or make tax evasion easier and tax computation more cumbersome.

According to a report published by Statista in August 2019, retail e-commerce sales worldwide amounted to US$3.53trillion. Online retail revenues are projected to grow to US$6.54trillion in 2022. Meanwhile the top 3 online stores revenue (US based Amazon.com, China based jd.com and US based Apple.com) amounted to just under US$100billion 2017. The report went further to highlight that desktop PCs are still the most popular device for placing online shopping orders although mobile devices, especially smartphones, are catching up.

The foregoing is further proof of the growing significance of fintechs and their services in the global economy. Quite a number of these Challenger banks are spreading to other regions across the globe and have announced plans to launch current account product types in the nearest future. Their presence is obviously not a fathom trend that may soon blow away leaving traditional banks to regain their dominance within the payments and settlements space. Fintechs are here to stay and perhaps the easiest way for the traditional banks to cope with them would be through acquisitions or simply partner with them under some form of scheme arrangement. Banks that opt for the former strategy must move swiftly though. The viral pace at which the Fintechs are growing will not allow them remain easy prey for too long.

This Article was written by
OLAWALE HAMED
05/12/2019