As incumbent financial institutions (FIs) and fintechs become more collaborative with each other, banks are growing more concerned with another type of competitor, so-called tech giants or platform providers like Amazon in the US and Alibaba in China.
That’s because these resource-rich and digitally native firms are moving deeper into financial services. Now, new research from consultancy McKinsey has not only validated but quantified these concerns.
McKinsey’s data gives a picture of the damage tech giants could wreak on banks:
- Tech giants are encroaching on a particularly lucrative aspect of banks’ business. Financing and lending activities produce 53% of the banking industry’s revenue, but account for only 35% of its profits, according to the consultancy. By contrast, what McKinsey calls “distribution,” the bringing in of new customers and the provision of a wide range of services, produces 47% of industry revenue and 65% of profits. Distribution is precisely what tech giants specialize in, leveraging their superior customer insights and embeddedness in consumers’ lives: Tencent alone, for example, provides its customers with a wide range of services from entertainment to payments to chat app WeChat, which has about 938 million monthly users. Their tech savvy means they may quickly gain a competitive advantage over incumbents in one of their most lucrative business areas.
- Consumers’ willingness to bank with tech giants stands to dent banks’ return on equity (ROE). If retail and corporate banking clients were to switch over to tech providers for banking services at historical rates of tech adoption, the industry’s ROE would tumble by four basis points to what McKinsey calls an “unsustainable” 5.2% by 2025, the consultancy estimates. At the same time, there are growing indications that consumers would be more than willing to source their financial services from these players, boding well for companies like Rakuten in Japan, Alibaba and Tencent in China, and Amazon in the US as they begin offering an ever-wider range of financial products.
All of this indicates that incumbent banks have to accept the inevitable and plan for a new future. Banks can’t realistically keep these tech giants from becoming major financial services players, especially given the funding at their disposal, the ease with which they enter new business areas, and their high customer trust. Instead, incumbents should be looking further ahead and imagining what a financial services landscape transformed by such players will look like, and how they can fit into it. At a very minimum, they should ensure they can integrate easily with such players’ modern systems — which few at the moment say they can do — to avoid being disintermediated, as it increasingly seems customers will source most of their services from such platforms.
Fintech hubs — cities where startups, talent, and funding congregate — are proliferating globally in tandem with ongoing disruption in financial services.
These hubs are all vying to become established fintech centers in their own right, and want to contribute to the broader financial services ecosystem of the future. Their success depends on a variety of factors, including access to funding and talent, as well as the approach of relevant regulators.
Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider’s premium research service, has put together a report that compiles various fintech snapshots, which together highlight the global spread of fintech, and show where governments and regulatory bodies are shaping the development of national fintech industries. Each provides an overview of the fintech industry in a particular country or state in Asia or Europe, and details what is contributing to, or hindering its further development. We also include notable fintechs in each geography, and discuss what the opportunities or challenges are for that particular domestic industry.
In full, the report:
- Explores the fintech industry in six countries or states, and identifies individual fintech hubs.
- Highlights successful fintechs in each region.
- Outlines the challenges and opportunities each country or state faces.
- Gives insight into the future of the global fintech industry.
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