In the last decade, the banking landscape has become more fragmented and competitive, and is continuing to evolve at a rapid pace thanks to technological advances and regulatory changes. The digitisation of financial services has resulted in some banks being left behind – in part due to legacy infrastructure, and in part due to incumbents being slow to react once the industry was no longer monopolised.
The emergence of new providers initially did little to impact the revenue streams of traditional financial institutions, but recent research by Accenture shows that FinTechs and other challengers are capturing more than a third of new revenue in the UK.
So how did this revolution begin? To understand how FinTech is changing banking, we need to look at key drivers affecting each core banking function.
One of the first core banking functions to be disrupted was payments. Moving money between accounts had long been a chore – something as simple as sending money to a friend usually required a trip to the bank or access to a card reader to make a transfer via online banking. Making payments internationally was even worse, for consumers and businesses alike: not only was it slow to send payment across borders but it was also expensive.
A number of influencing factors changed the payment landscape early on in the FinTech revolution. Innovation in e-commerce helped things along, with payment processor PayPal paving the way for frictionless online payments all the way back in 2002, following its acquisition by eBay. No longer was it difficult to purchase a product from another country – with a single click fees were calculated automatically and the transfer was completed.
FX and money transfer specialists developed solutions for individuals who wanted to save on FX and transaction fees, and capitalised on this gap in the consumer market. Pioneers such as TransferWise and Revolut were both valued as billion-dollar businesses within five years of launching.
Mobile payments provided another fast and inexpensive way to transfer money to peers. Mobile P2P transfers specialist, Venmo, is now processing billions of low-value transactions per month, while Alibaba’s mobile payment solution, AliPay, has become the largest platform of its kind in the world. As the penetration of smartphones increases, the adoption of this type of payment technology shows no signs of slowing down.
As users grew more comfortable utilising non-banks to make payments, the consumer market became somewhat saturated. Payments companies started to set their sights on the B2B market, but found it difficult due to the legacy infrastructure used by banks being inaccessible to new entrants. However, by building a super correspondent banking network, financial utilities, like Banking Circle, are now able to offer their clients the ability to provide customers with secure, fast, and cheap cross border payments.
Bank accounts remained the same for decades. High street banks offered almost identical account types, with a few variations on fees or benefits, especially when it came to personal and small business banking.
FinTechs, and challenger banks, in particular, recognised that many customers were growing frustrated with banks. Following the financial crisis in 2008 and the mis-selling of products such as PPI, trust in traditional providers was waning faster than ever before. New entrants were able to lure customers away from incumbent providers by offering better rates, frictionless online banking experiences and great customer service. Many challenger banks in the UK are digital, mobile-only banks with no physical branches, allowing them to deliver better value bank accounts.
The digitisation of bank accounts provided users with easier access to global banking services from FinTech businesses as well as new challenger banks at a lower cost benefiting consumers and businesses alike. This has benefited the unbanked and underbanked, giving them access to financial services even if they have previously been turned down for a current account.
Lending has long been a great source of revenue for banks, but after the financial crisis, many individuals and businesses have been unable to secure loans with traditional lenders. The number of loans approved since 2013 has fallen by 42%, leaving people with fewer borrowing options. For those who do manage to access funding, they may be subject to high interest rates and inflexible repayment options.
As a result of traditional lenders being less able to offer finance, payday loans skyrocketed in popularity, targeting consumers with short-term loans at eye-wateringly high-interest rates. Prior to the FCA bringing in payday loan regulations, there was no cap on interest rates or fees. In some cases, affordability checks were not being conducted properly, leaving many borrowers with huge debts that negatively impacted their credit rating.
Small businesses – and especially startups – also struggle to secure funding. However, the rise of P2P lending, which works by multiple investors spreading their portfolio across a number of businesses to minimise risk, can provide SMEs with fast access to cash, with varying interest rates based on the level of risk.
Cash advance loans, which are based on a businesses’ monthly revenue, give online merchants flexible financing options by allowing them to pay back a small percentage on each transaction until the loan has been repaid – meaning that repayments can ramp up during busier periods, and be scaled back during quieter times.
When waiting on payment from customers or suppliers, cash flow can be impacted, and having to secure short-term financing to temporarily boost funds can be a nuisance. One option for merchants that need to access cash quickly is receivables factoring. This type of loan works by advancing the sum of the outstanding invoice owed to a business. When the invoice is due, the full amount borrowed is paid directly into a settlement account to clear the debt.
With stringent regulation, high-value, long-term loans, and lengthy application processes, mortgages look to be one of the more difficult core banking functions to disrupt. FinTech mortgages have increased in popularity by digitising the process, transforming it from a slow, paper-based process to faster, transparent, more efficient systems. To date, very few providers have offered much beyond comparing the best deals, or presenting investment opportunities in bricks and mortar.
Online mortgage platforms have eliminated the need to make face to face appointments with a mortgage broker or bank to arrange a loan, but for now, traditional lenders still dominate the market.
What does the future of FinTech look like?
The banking landscape has changed significantly over the last 10 years thanks to the rise of FinTech, and for both banks and FinTechs to thrive, collaboration rather than disruption looks to be the best route to take.
Anders la Cour, co-founder and Chief Executive Officer of Banking Circle, added: “Cross border B2B FinTech payment volumes are still low in comparison with that of the banks, but the influence of new FinTech entrants is powerful. With B2B payments beginning to evolve, there is now an exciting opportunity for banks to build solutions which can better serve their corporate customers. To make this happen, they need to engage with other entities that can provide the pipes and plumbing, for services offered outside their core geographies. That is not an easy thing for a traditional bank to enact.
“We have spoken to many banks and found that they are gearing up for the challenge, ready to take on the FinTech threat by partnering with FinTechs and other providers to deliver better solutions. Financial Utilities which do not compete with the banks or the FinTechs can underpin a financial institution’s offering, providing their non-core functions such as payments and lending. This allows the banks to focus on their customers and add value to their customer service proposition, and, importantly, remain competitive.”
By building a financial ecosystem made up of niche areas of core banking services, both parties can benefit. Traditional providers have the benefit of a strong brand and established customer base, and FinTechs can work with them behind the scenes to optimise operations to deliver better products and services to the end user. It’s a win-win situation for all.