Companies offering new digital payment methods have emerged on the financial scene, disrupting the monopoly of traditional banking services.
By Joelyn Chan, Edited by Isabel Yeo
A new player has emerged onto the financial scene – FinTech firms. They are challenging traditional banks as the go-to place for all related financial services. About 1,400 FinTech companies are operating in 54 countries today.
More people are choosing to go digital
The 2017 EY FinTech Adoption Index reveals that the average global adoption rate is 33%, improving from 15% in 2015. The global FinTech adoption rate is forecasted to reach 52%, suggesting that a majority of the world population will use Fintech services. Concurrently, global payment revenue is increasing with single digit year on year growth.
Source: McKinsey
In the foreseeable future, FinTech firms are likely to eclipse banks as the customers’ choice. FinTech companies such as Wells Fargo, Tencent, and Ant Financial are already household names. Top FinTech unicorns such as Ant Financial from China, First Data and Stripes from the US, and One97 Communications from India are already worth more than US$1 billion.
Some FinTech businesses have even acquired traditional banks. Tandem, a FinTech company, bought European bank Harrods and transformed itself into the ‘New UK digital bank’.
New banking legislation helps FinTech firms grow
Improvements in regulation and governmental support for FinTech startups are contributing to the FinTech boom. The European Union (EU) legislature issued new rules to help FinTech firms compete with banks. Set to take effect by 2018, it will give non-bank service providers a clear legal right to access bank customers’ data.
The United Kingdom’s (UK) Competition and Markets Authority will follow suit. Via its new Open Banking standard, it will promote greater sharing of customer’s data and further integration of the financial services ecosystem. This legislation will be beneficial for the FinTech industry. A report by McKinsey estimates that “banks in Europe and the UK currently have $35 billion, or 31 percent, of profits at risk because of digitisation in general.”
According to Valdis Dombrovskis, Vice-President of the European Commission, the updated legislation aims to “open up the payment market to new technologies and more competition, to the benefit of consumers and retailers.” Nations are backing the growth of FinTech firms at the expense of traditional banking services.
The Stickiness of Credit Cards versus the Convenience of Digital payments
It is easy to see why nations are encouraging the shift to digital payments. Consumers value convenience, real-time connectivity and digitalisation. As unchallenged financial providers, traditional banks have been slow to meet these preferences.
EY Global Banking and Capital Markets Emerging Markets Leader, Jan Bellens, noted that the use of credit cards had been a lucrative source of revenue to banks. In Singapore, credit card transaction fees of 1.5%-3% are higher than other countries, such as China’s cap of 0.45%. It is of little surprise when banks dish out attractive perks to solidify credit cards’ integral role in consumer lifestyles.
On average, Singaporeans hold 3.5 credit cards each. The assortment of credit cards and payment modes overwhelm consumers and merchants who are open to change, thereby reinforcing their habit to stick with familiarity.
With the emergence of FinTech firms and digital payment services, consumers now have platforms offering the convenience they want. The innovation of FinTech companies is disrupting the traditional payment system. China, in particular, is at the forefront of this digital revolution.
Alibaba’s Hema grocery store concept combines offline and online shopping. Customers can pay for their items with their Alipay digital wallet by just downloading the Hema app and scanning barcodes on products. This digital wallet threatens to make credit cards’ prepayment offerings redundant. Wechat launched its own online bank “Webank”, allowing the Chinese to borrow up to RMB200,000 (US$30,000). These Chinese’s e-payment giants will also tie up with Southeast Asian partners like CCPay and GHL to gain insight on the local market and bring their digital payment systems to Southeast Asia.
Looking at the growth trajectory of Alipay and China’s mobile payment disruptors, the world’s established financial institutions are at risk of losing greater market share.
Traditional Banks and FinTech companies can be partners instead of competitors
While traditional banks and FinTech companies seem like natural competitors, they need not be. Services offered by traditional banks and FinTech firms are not mutually exclusive.
FinTech companies can equip traditional banks with digital services. Meniga is an example of a FinTech start-up that provides digital banking technology to banks. It acts as an active innovation partner to help banks offer their customers a better banking experience.
Traditional banks and FinTech firms can also collaborate to provide consumers with a greater variety of payment methods. Currently, Alipay and Wechat pay work with traditional banks to allow users to link their credit cards to their online wallets. In Singapore, PayNow, a peer-to-peer transfer service provided by the Association of Banks in Singapore also taps on the Fast and Secure Transaction (FAST) network and impose no fee on merchants and consumers.
As envisioned by IBM, “the successful bank of tomorrow will likely be a broker of services, quilting together capabilities from a variety of partner organisations, including FinTechs, with the bank and its brand at the centre.” FinTech firms and banks need not be competitors; they can also be collaborators.
Banks are likely to provide more digital services in the future
It is not yet the end for the long-standing banks that have been dominating the financial industry. Banks are still the frontrunners in this sector, though FinTech firms remain hot on their heels.
Traditional banks are likely to adopt or integrate FinTech services as part of their suite of services. FinTech companies should aim to provide these services to banks, lest they lose their competitive advantage when banks internally develop their digital payment services. National regulators will also influence the landscape of the payment industry as they can implement game-changing laws which might give either side an advantage in the market.
As the industry saturates, we are likely to see a melding of both parties, with innovation from FinTech firms complementing established banks’ significant capital and networks. There will be many interesting developments to watch in the digital payment space in the coming years.
