Moody's: Fintech to drive transformation rather than disruption for banks

While the rise of fintech firms highlights the shift to digital in financial services, banks will retain a place at the center of the industry and continue to work both alongside and in competition with new entrants, said Moody's Investors Service.

Estimates for the number of fintech-related startups range as high as 4,000 companies, globally, with total estimated venture capital investment rising from about $2.4 billion in 2011 to more than $19 billion in 2015. Along with the high growth rate of investment, 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.

In a new report, Moody's said it anticipates an evolutionary path for banks, as the traditional players take advantage of new technologies and approaches to improve the consumer experience in order to maintain competitiveness. While the Millennial cohort -- who are typically more open to, and often expect, technology-enabled services and interfaces -- are behind much of the impetus for fintech's rise, Moody's analysts said it will likely be a few years before this large group predominates in terms of consumption of financial services.

"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," said Moody's Senior Vice President Robard Williams. "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."

The ratings agency noted that much of the focus of fintechs has been on retail banking services, largely lending and financing along with payments-related products and services. While the new entrants have shown growth in these areas -- in some cases filling space vacated by the banks due to post-crisis regulation -- Moody's said banks have a number of competitive advantages that place them in good stead as the industry evolves including large customer bases, deep client relationships, long lending histories and experience navigating regulatory bodies.

"For banks, being traditional players in the space remains a significant competitive advantage, but it also means they have the resources to build internally or acquire to establish a presence on new platforms," said Williams.

Though a major competitive reversal for banks is unlikely, Moody's noted that several forces could shift the scales or accelerate the transformation of the industry including greater movement toward open data, a more defined regulatory stance would crystalize, and perhaps change, the rules of engagement, the introduction of a 'killer app' or the entrance of one or more bigger technology companies into the fintech space.

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