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18th August 2020 | Daniel Kubera | Business Analyst

The big change in the banking landscape

Incumbent had to change and that is obvious. What are the reasons for the banks to restructure? Will traditional banks still exist in decade now? Are the new alternatives going to survive? How the banking landscape is going to change?

External threats of traditional banks

The peak of innovation in banking sector has been initiated by the appearance of the direct and online banking. The revolution has been partially described in the previous article The future of banking is mobile and mostly cashless.  

The rise of the smartphones’ number and growing needs for cheaper services among the new generation of customers and also, limited possibilities of digital restructuring of incumbents and direct banks, had left unmet demand and space for the new players to enter the market. 

Growing competition

New rivals came up with fully functional mobile apps, cheaper or even free services. The group of first companies that wanted to replace traditional financial institutions, initially did not have any name. As the new industry has been growing in both tech and financial sector, it has evolved a name of FinTech. 

Complete banks’ replacement 

Initially functioning as a cheap alternative for payments and subsequently prepaid cards, online currency exchange, savings, mortgages and loans, online brokerage or even wealth management services.  Gradually undermining the monopoly position of the banks in these matters. 

Incumbents’ adjustments to growing demand for FinTechs

Currently FinTechs are not only an alternative. They became a valuable and reliable replacement of the traditional banks by obtaining banking licences. In such a situation, incumbent banks had to lower the fees, even if they were balancing on the breakeven point, to maintain their customers’ retention levels and offer loyalty programmes of hundreds of pounds and euros for opening accounts, in order to gain new customers.

Qualities that will edge the competition

Competition is fierce. Traditional banks on one side have a well-established position on the market, brand awareness built for years and a huge customer base. FinTech banks still have to build trust and customer base but their scalable business model allows them to offer low-cost or even free of charge services, by making use of the newest digital technologies, outrivalling incumbents in this matter. 

Who is going to win the battle? There are 3 main factors determining the success:

Funding: most of the FinTechs struggle with raising funds, still unprofitable and relying on venture capital and private equity investors. While the traditional banks have income sources from customer base and powerful resources base which has been built for years.

Ability to adapt: as the FinTechs do not have any branches, their workforce is a fraction of traditional banks’ and their IT infrastructure is still being developed so their transformation capabilities are higher. Incumbents, with thousands of the workforce and branches, outdated IT infrastructure and high cost base, have limited possibilities to adjust to the changing customers’ needs and challenges of digitalisation and new technologies. 

Profitability/pricing strategies: as it has been said before, most of the FinTechs are not profitable. Their policy as a free of charge service is fading away in order to find income sources. Traditional banks are getting cheaper but due to high cost base, will never be able to lower fees to the FinTechs’ level.

Who is going to survive?

The change in the banking industry has been significant and easily noticeable. Banks had to restructure their business and operational model because of appearance of the new competitors. FinTechs’ offer has been more competitive taking into consideration the price and digitalisation. Lack of brand awareness and trust has been filled by obtaining banking licences and building customers trust basing on cheap and convenient services. In a few years the incumbents will have to adapt to the changing financial world, possibly by closing branches and further reduction of the workforce and gradually lowering the fees for the services. FinTechs challenges include seeking for income, funding sources and gaining more brand trust and market share. Taking into consideration all those factors, it is possible that eventually both, traditional banks and FinTech companies will be able to survive but certainly not all the current market players will make it. Some will compete and succeed in this way. For some entering to cooperation with market rivals could be the most efficient solution to thrive.

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23rd September 2019 | Daniel Kubera

The Future of Banking Is Mobile and Mostly Cashless