In the last five years, fuelled by regulatory changes, FinTechs have begun to challenge the business models of incumbent banks. While the impact has been minimal, there is greater potential for new entrants to steal market share than banks may have projected.

A stress test report published by the Bank of England explores a scenario in which FinTech increases competition in the market, and highlights the importance of major banks taking the necessary steps to ensure a resilient, yet flexible long-term strategy.

The three main risks identified were:

• Competition – particularly from the emergence of Open Banking
• Large reductions in cost – as banks look to cut costs, they leave themselves vulnerable as they risk being unable to execute plans fully, and may fail to deliver a broad range of services as well as a more agile new player can. This risk is increased as with more competition comes the potential for the cost of customer acquisition and retention to rise
• Environment – low growth and low-interest rates may raise the equity risk premium more than banks expect

The study shows that the UK banking system is resilient against another recession, even when stress testing an economic scenario more extreme than the global financial crisis of 2008. However, the current environment, with low growth and low-interest rates is restricting the revenue that can be generated by banks, and this is preventing them from investing in the digitisation and optimisation of core banking services. This is leaving them wide open to innovators ‘unbundling’ banking services into niche offerings, and delivering them better.

FinTechs are typically able to offer customers access to these services at a lower cost. Banks, on the other hand, are throttled by legacy infrastructure and the high cost of delivering innovative solutions to an established customer base. Regulation has opened up the landscape to FinTechs, but has also forced banks to focus on maintaining the client relationship within their domestic geographical core area. The increased regulatory costs have also made it less attractive for banks to deliver core banking services outside of their core domestic area.

How can banks remain competitive in this scenario?

Financial utilities, like Banking Circle, are helping banks and FinTechs to offer products and services that would typically require relationships with multiple banks outside their domestic core area, leaving them more time, money, and resource to focus on the customer relationship.

Our utility model provides banks and FinTechs with an infrastructure that helps build global payment capabilities efficiently and reliably. Find out more about what Banking Circle can offer today.