Financial and Monetary Systems

What does the rise of fintech mean for banking?

A pedestrians walks under an arch opposite the Bank of England in London March 5, 2015.

Financial technology firms are making a beeline for profitable growth areas, so where does that leave traditional banks? Image: REUTERS/Suzanne Plunkett

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Financial and Monetary Systems

European and US banks may be on the brink of an "Uber moment", as the explosion of fintech disrupts the industry and leads to massive job cuts over the next decade, a new report predicts.

Up to 30% of current employees in banks across Europe and the US may lose their jobs to technology by 2025, according to the report by Citigroup, which forecasts that around 1.8 million positions will go – mainly as a result of the automation of retail banking.

Are banks approaching a tipping point?

Investment in fintech has soared in the past decade – from $1.8 billion in 2010 to $19 billion in 2015. This comes as financial technology firms make a beeline for profitable growth areas.

The Citigroup report looks at where fintech firms are putting their resources, the amount of business they have already gained, and what this means for the traditional banking industry.

It found the majority of this investment is concentrated in the payments area, which is where banks are seeing the most competition from fintech firms.

Kathleen Boyle, managing editor at Citi GPS, wrote in the report that advances in technology have changed customers’ relationships with banks.

“Customers rely less and less on walking into a branch for their banking needs, and instead have digital options to help them – ATMs, online chat, mobile phones and internet banking,” she wrote.

So have US and European banks reached a tipping point? Boyle believes traditional financial institutions still have the “upper hand in terms of scale” – only about 1% of North American consumer banking revenue has moved to new digital models.

But she adds that “given the growth in fintech investment, this isn’t likely to continue for long”.

In China, the picture is very different. The report says internet giants have moved into financial services and gained considerable market share in e-commerce and third-party payments.

These new entrants were faster than the banks to offer convenient, reliable, fast and cost-efficient alternatives to traditional bank payments.

“China's fintech companies often have as many, if not more, clients than the top banks,” Boyle wrote. “Fintech players often have well-resourced parent companies in e-commerce and finance that can sustain larger and more balance sheet intensive businesses that Western venture capital funded rivals.”

She added: “As customers shift their behaviour and move more towards digital solutions, banks will need to rethink their digital strategy.”

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Financial and Monetary SystemsFourth Industrial Revolution
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