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How will banks face the Fintech challenge?


The financial sector is reinventing itself - thanks to technology. Fintech companies tripled their investment in 2015, and expect to decidedly burst into the Spanish market in 2016. Are traditional banks prepared?

14 january 2016

The big future threat to traditional banking is not one sole alternative actor. At least for now. Banking’s complex puzzle persists as one but the individual pieces are starting to wear away. The financial sector is already feeling the effects of the first wave of Fintech startups, tech companies that are invading specific sectors of the financial business. Peer-to-peer lending, Robo-Advisors… The Fintech lexicon grows every day in line with their market share: 0.5% in Spain for now, 12,4 billion dollars in the USA (compared with the 15 trillion that the States’ five biggest banks move) – relatively small numbers, but relevant considering  the sector’s tender age.


Why is the financial map changing?

Every year since the financial crisis erupted, the banking sector’s main worry has been how to return to pre-2008 confidence levels. 2012, 2013, 2014, 2015… The debate is the same. Indicators such as the one led by consulting firm Edelman prove this is a global issue (perhaps slightly more acute in Spain). As banks await the reflowing of credit, another solution could be to offer a more personal service to clients.

But this relate with the tendency to use digital services more and physical branches less? Banks “generally do not have the infrastructures needed to link them to digital users”, says Chris de Noos, director of the World Savings Banks Instutute. Apps that work as complements of existing models, as opposed to Fintech firms that work in a more independent way.

One problem for banks is that these startups focus on the most profitable chunks of their business, without having to drag along the burden of additional structural costs and commissions. For example, just the average management commission for a mixed equity fund is 1% wholesale and 1.45% retailer, while a Robo-Advisor such as Wealthfront (currently only available in the USA) charges a total annual fee of 0.25%. The advantages of not depending on a physical solicitor are not just limited to reducing time and mistakes (in theory), but also the costs that hurt an investor’s profitability.

For now Fintech startups are erasing intermediation from banks for this kind of financial actions (and others, including the buying-selling of currencies), while they lean on them for less profitable services. In this sense, some of these startups might even help boost the banking sector’s business (like Square, “a system that makes it easier for small businesses to take card payments”). But the greater danger for banks should arrive once the fragmentation of financial services is near completion – as soon as Fintechs become established. A “second wave” of businesses that fight over the core business sector of banks: holding and managing funds. This is the prediction of Kantox CEO and President of the Spanish Fintech Association Philippe Gelis, a prophecy that, should it be fulfilled, would leave traditional banks in an uncomfortable situation. And that’s without wondering what role the four tech giants will play in the future.

Gráfico de la banca digital según el CEO de Kantox

The bank of the future according to Kantox CEO Philippe Gelis: decentralisation of services around a core of digital banks. 


Adapt or perish? Whatever the outcome, the reinvention of the banking sector under the threat of a technological revolution shall be a fascinating scene to observe.