Big banks can handle fintech competition

Moody’s Investors Service has observed that the larger banks are investing in their own technology, as well as collaborating with and backing fintechs, to gain new capabilities.

The report noted the incumbent banks’ focus on residential mortgages, which make up around 75 per cent of total system loans, has created opportunities for fintechs to specialise in products outside the sector.

As a result, fintechs have targeted underserved markets such as unsecured lending to consumers and small businesses, Moody’s said.

Simultaneously, digital banks were noted to be emerging as a direct competitor to the large institutions, “taking advantage of technology and low operating costs to potentially provide cheaper products than traditional banks while meeting growing consumer demand for digital services.”

The report said that the future position of banks will be determined by their ability to adapt to four drivers of change: shifting customer expectations, competition increasing as technology advances and more new players arrive, infrastructure and cost management being managed with technology and the level of support and scrutiny from regulators.

Funding constraints and regulations will limit the growth of fintechs, Moody’s said, which may hinder them as a threat to banks.

The profitability and ability to maintain asset quality of new fintech lenders has also not been tested, the report added, as they have not travelled through a complete economic cycle.

“Fintechs have grown substantially in recent years, leveraging technology to penetrate segments of consumer and small-business unsecured credit that are undeserved by incumbent banks and areas that do not require the liquidity and scale of a bank’s balance sheet, such as payment services,” Daniel Yu, vice president and senior analyst at Moody’s, said.

“The major incumbent banks have been responding to this threat by aggressively pursuing technology development, leveraging their strong financial resources, while the smaller banks with limited financial services are more vulnerable to fintech disruption.”

NAB’s digital bank in particular collaborated with a software firm specialising in artificial intelligence to launch the world’s first AI-based assistant for digital home loan applications in February. In August, CBA arranged the first bond issuance solely using blockchain.

The research added that open banking will give start-up digital banks access to a broader customer database, creating more opportunities for fintechs to give more personalised services.

The new system will initially apply to the big four banks, who are required to make product data available from July. Customer data will be available for all institutions from 2020 if the ACCC deems open banking as robust.

The regulators support digital banks but do remain sceptical of other fintechs. APRA introduced a regime to grant restricted authorised deposit-taking institution (ADI) licences a year ago, paving the way for fintechs to become ADIs.

Volt was the first neobank to receive an ADI licence in January.

ASIC said, in a report in August, that it would actively support the sector, expanding its regulatory sandbox to include digital firms taking household deposits and offering other retail products.

“If implemented, this will make it easier for fintechs to build capabilities to implement new products and services,” the Moody’s report said.

Additionally, most fintechs have relied on equity financing from their founders or venture capital investors, the research found, with some businesses going public and some tapping into equity crowdfunding.

[Related: Bank customers to expect Netflix-level personalisation]