Banks’ central role in the financial system is unlikely to be displaced by the rise of fintech firms, according to an opinion from ratings agency Moody’s.
Estimating that, around the world, there are currently 4,000 fintech businesses, Moody’s suggests that it is far more likely that established institutions will learn new tricks from this diverse crop of emerging players.
As a result, today’s big incumbents of the financial sector will steadily become more broad-based, full-service technology firms.
Typically, the opinion notes, market entrants to the fintech segment have shown a knack for attracting millennials, who are looking for more flexible financial services than banks currently provide.
However, Moody’s predicts, once banks acquire fintech-like capabilities, they will have a competitive edge determined by their longer lending histories, larger customer bases and proven expertise with navigating regulatory bodies.
Moody’s senior vice president, Robard Williams, said: “Millennials lag prior generations along a number of indicators important to financial services firms, including lower household formation and home-buying rates, higher student-loan burdens, lower earnings and higher debt-to-income ratios.
“Banks will certainly need to transform to appeal to this generation and counter fintechs’ rise, but many incumbents have made significant steps towards implementing their own digital strategies and they have some time before the full transformation is complete.”
In its analysis of the fintech scene, Moody’s has judged that the majority of firms are currently focused on retail-banking services – largely lending and financing – with others launching innovative products and services related to payments.
While those firms are credited for showing growth and – in some cases – filling gaps that banks have vacated because of post-crisis regulation, Moody’s considers a “major competitive reversal” a long shot.
That said, its opinion leaves room for four potential trends that could dramatically “shift the scales” of the industry, should any of them they become a reality:
Williams added: “For banks, being traditional players in the space remains a significant competitive advantage, but it also means they have the resources to either build internally or to acquire, to establish a presence on new platforms.”
Moody’s estimates that total venture capital across the world’s fintech firms has risen from around $2.4bn in 2011 to more than $19bn in 2015.
“Along with the high growth rate of investment,” it says, “the sector has shown signs of maturation – with later-stage investments accounting for a rising share of the total, and the number of ‘exits’ via acquisitions and (a still small number of) IPOs also increasing.”