15th July 2016

What is the long-term impact of FinTech on banking?

Written by Matthew Field, Policy Adviser, Digital

As we approach London FinTech Week 2016, it seems like a good time to pause and take stock of where we think FinTech is headed in the long term. The potential for FinTech start-ups to disrupt traditional financial services and banks in particular has been recognised for some time now. In part, with the loss of confidence in banks following the financial crisis, some of this talk has taken the form of hope more than reasoned expectation. The start-up businesses we tend to refer to when we say ‘FinTech’ have certainly played up their difference to banks (and fair play to them), by marketing themselves as being able to provide a better service for less money thanks to new technologies. But the question of whether they will replace banking and usher in a new era of finance without large banking institutions remains to be seen.

There have long been questions among insiders as to whether some of the FinTech models out there are actually able to provide services for less than the traditional players. Mainstream media and advertising has continued to push the gospel of technological efficiency resulting in lower costs, but the reality is that many of these businesses are simply willing to operate at a loss in order to gain market share. A chink in the armour finally appeared at the end of May when the FCA warned FX transfer companies not to use the interbank rate in their advertising as it gave the impression that the rate was actually available to consumers which, of course, it is not. The FCA’s comments followed a letter from the Advertising Standards Authority to Transferwise, one of the most well-known of UK based FinTechs, telling the company to change one of its advertisements because statements on bank rates in the ad could not be verified (if you want the full story be sure to read the FT Alphaville piece here).

The sceptics among us rejoiced that for once there appeared to be a bit of sanity coming into the otherwise hype-filled FinTech space. Yet it would be a mistake to think that favourable pricing is the rock on which FinTech is built. The latest “FinTech Adoption Index” from EY shows that price is far from the leading reason cited by those using an alternative financial services company. Although price may be the second most important factor at 15.4 per cent  (and let’s ignore the difference between actual and perceived price), you could reasonably add up categories one, four and five under ‘better services’ to find that it accounts for 65 per cent of respondents top reason for looking beyond traditional providers of financial services.

Top seven reasons for using FinTech

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Consumer focus on service and products over price is the biggest clue to the future impact of FinTech and banking. If you are knee deep in FinTech blogs you have probably heard plenty of talk of benign credit cycles and loss-leading business models. Some of these predictions may be too pessimistic and I don’t think anyone would argue that absolutely none of the new start-ups we are seeing coming onto the scene now won’t be with us years down the road. But whether or not these start-ups survive, become the next Google of finance, are subsumed into larger incumbent firms or just go under, their lasting legacy will be to have changed customer expectations of financial services.

So as we prepare to dive into London FinTech Week and consider the potential of the innovations being developed, let’s keep the longer-term view in mind. Online and app-centric models have offered an ease and smoothness of interaction that the banks cannot yet rival. But banks are investing heavily to compete and already we are seeing a narrowing of the gap. Within this we have to keep in mind that there is more to FinTech than retail facing solutions. Banks are just as interested in the back-end solutions and this is where we could see the greatest change. But in terms of consumers, if you want to know what the long-term impact of FinTech on banking will be, think that years from now when we look back on the “FinTech” period we may very well think not of the leaps and bounds in technological achievement, but of the radical changes in consumer attitudes and expectations.