The Bank of England (BofE) published its 2017 UK bank stress test results on 28 November. The BofE found that incumbent institutions are probably underestimating the impact that increased FinTech competition could have on their profitability:
- Diminishing revenue from overdraft products. Currently, unarranged overdraft fees are one of the biggest contributors to UK banks’ annual pre-tax profits. FinTechs, like personal financial management services, should help people better manage their money to avoid becoming overdrawn, and aggregation platforms will increasingly redirect customers to cheaper credit options, diminishing their need for overdraft facilities and reducing banks’ returns on such products. Banks may be doubly hit if the UK Financial Conduct Authority decides to impose a strict price cap on the overdraft fees banks can charge customers.
- Making customer retention and cross-selling more challenging. With the advent of Open Banking and the obligation to share their customer data with third parties, banks will face a much higher risk of disintermediation. Penetration of FinTechs could minimise customers’ engagement with their bank. Customer loyalty would thus be eroded; making it harder for incumbent to cross-sell products to clients, and pushing them to increase their marketing spend to retain users.
- Increasing vulnerability to cyberattacks. There could be more loopholes for cybercriminals to exploit in relation to traditional bank customers. While the BofE notes that the UK’s major banks did account for increased cybersecurity spending in their 2017 stress test submissions, it says that they are probably underestimating the rise. Doubling their cybersecurity spending by 2023 would mean a £0.7 billion reduction in banks’ annual pre-tax profits.
These risks stem not from direct FinTech competition, but from its broader influence on the economy.