How Fintech Will Alter the Complexion of Financial Services
By Keefe, Bruyette & Woods
Introduction
The financial services industry is undergoing major changes driven by disruptive fintech companies that are not only nimble and armed with better technological capabilities but are also enabled by groups of investors and regulators that have been promoting their expansion. While there are likely to be significant changes in the future, we believe the extent of these changes and their impact on the industry hinge on some factors outlined in this report.
Digitization and Embedded Finance Are Largest Drivers of Change – Technology is driving significant changes in the way consumers consume goods and services, and there is a clear preference among Millennials and Gen Z towards simplicity and aggregation where fewer intermediaries are involved. This might mean that consumers rely less on the major household financial services brands (i.e., Chase, Citi, American Express, Schwab, Prudential, etc.) and gravitate towards two-sided platforms like Apple, PayPal or Google; or others vying to be more like this, such as Amazon or Walmart. The onus is on the incumbents to stay ahead and being flexible as the world digitizes and more third-parties (i.e., merchants) embed financial services as an extension of their existing relationships with consumers. Open banking is also a factor as it democratizes consumers’ ability to make financial information available to third parties.
Modern Tech Platforms Offer Greater Scalability and Utility – State-of-the-art global, cloud-based technologies are enabling new fintechs to disrupt legacy tech oriented players that are mired with disparate, redundant and antiquated platforms and tech architectures. New technology not only enables greater productivity from a top-line perspective but is significantly more scalable. For example, we estimate that Artificial Intelligence (AI) could improve RoTEs by 0.7-1.1ppts for US and European banks.
Broadly It’s Still Early Days and Technology Is Still Evolving – While some aspects of the future as mentioned above are clearer to identify, others are still in their development phases. For example, it is early days in the development of crytocurrencies and the utilization of blockchain technology. While there is signifcant debate on the utility and viability of both, we believe they have a place in the future and their roles will become clearer over the intermediate term. Artificial Intelligence (AI) is being woven into the underpinnings of financial services whether it be for underwriting purposes, sifting through reams of data to find alpha generating or ESG compliant investment ideas, or routing customer inquiries to the appropriate channels. We expect this technology to play a larger role in not only modernizing the industry but also driving top-line growth and cost efficiencies.
Success of Fintechs Also Predicated on How Patient Investors Will Be – Most surprising is how patient the investment community and regulators have been with the fintech industry as traditional norms have been cast aside in the name of inclusion and technological evolution. We think a big factor for the success of fintechs will be how pragmatic each of these parties will be given growth is unlikely to be linear (i.e., how long will investors focus on revenue growth and not profitability) and regulators are likely to change certain aspects of fintech models and how they operate.
The Eight Most Important Areas in Fintech
Technology is driving change to products, business models, and distribution channels and redefining the competitive landscape for financial services firms. We have identified the following eight areas as potentially being the most influential in shaping the future of the financial services industry. In this report, we attempt to provide a perspective on how these are likely to impact the various subsectors within financial services, the biggest opportunities, and threats for fintechs and incumbents, and the companies that we believe have the ability to be endgame players.
- Digitization
- Embedded Finance
- Open Banking
- Cryptocurrencies and Digital Assets
- Blockchain Technology
- Artificial Intelligence
- Public Market Investor Hunger for Growth (i.e. Valuations)
- Uneven Regulatory Playing Field
Exhibit 1: Companies In Our Coverage With the Most Ability to Adapt and be an End Game Player in the Face of all the Fintech
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.