BANKS may be underestimating the risk of fintech to their business models, the Bank of England has suggested.
The central bank’s latest financial stability report warns that fintech may be causing “faster disruption” to traditional models than firms are projecting.
The Bank of England’s Financial Policy Committee and Prudential Regulation Committee conducted an exploratory exercise looking at the banking sector’s response to strategic challenges such as fintech.
The research, issued alongside the central bank’s stress tests of banking firms, highlighted pressures from the emergence of Open Banking next year and a higher cost of maintaining customers due to competitive pressures.
It said that fintech is making it easier for borrowers to avoid going overdrawn. It also said that Open Banking – mandating banks to share consumer data with third-party providers, including alternative lenders – will provide access to different sorts of finance, hitting the income streams of traditional models.
The Bank said there is an opportunity for traditional financial services firms to replace their legacy processes and costs but warned that better technology elsewhere could see profits threatened.
Banks were tested on how they would respond to an extended low growth, low interest rate environment with increasing competitive pressures from fintech. Respondents said their return on equity would be eight per cent, below the current targets of 10 per cent and above.
But the report cautioned that the costs may actually be higher.
“Competitive pressures enabled by fintech may cause greater and faster disruption to banks’ business models than banks project,” the Bank warned.
“The cost of maintaining and acquiring customers in a more competitive environment may reduce the scope for cost reductions or result in greater loss of market share.
“In a low growth, low interest rate environment, investors may perceive downside economic risks to be greater, raising the equity risk premium.”
The report also looked at the threat of fintech to financial stability.
In one example, the Bank says peer-to-peer lending could improve financial stability by providing an alternative source of finance for consumers and small businesses, but warned it could also lower lending standards.
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