Banks are becoming Fintechs, and Fintechs becoming banks. But incumbent banks are not standing still. As discussed earlier, many established banks are setting up independent Fintech-style banks using the same technology to benefit from improved customer experience and lower operating costs.

Others are improving their digital delivery capabilities on top of their legacy systems, with varying success.

Unbundling and Rebundling

As discussed in Business Models, banks are being ‘unbundled’ by Fintechs, leading to concerns about their long-term future. They have responded in several ways.

Marketplace banks are the most logical competitor to bank’s current business model, and BigTech is a threat to all banks.

Because of their huge user bases, GAFA and BAT and others are a threat to both traditional banks and Fintechs. Their strategy is rarely to compete head on, but to ‘cherry-pick’ lucrative services that they can deliver through their platform without the capital or regulatory burden facing many banks and Fintechs.  Another reason for not competing head on is that BigTech, such as Google and Amazon are also providing the new technology infrastructure on which many new and traditional banks are now operating, such as cloud computing services.

Fintechs can strip out business costs. According to CGAP research with Fintech leaders:

  • Customer acquisition costs can fall to between 5 per cent and 15 per cent of that of a traditional retail bank;
  • Some digital banks can spend just 1 percent to 5 percent of the cost of operating a branch by using alternative distribution channels;
  • The cost-to-income ratio can be over 20 percent lower for banks serving customers through digital channels compared to serving them through traditional channels.

What of the financial viability of Fintechs? Long-term financial viability, without venture capital funding, is questionable for many Fintechs that cannot, because of their licences, adopt the traditional ‘net interest margin’ model where they ‘borrow’ from depositors at a lower rate than they ‘lend’ out to other retail, commercial banking, or corporate banking customers.

Those Fintechs who can grow their revenue from lending activities are seeing the revenue grow, resulting in profitability that opens the opportunity of an Initial Public Offering (IPO) that realises the venture capitalists investments.