A financial review by the Monetary Authority of Singapore points how where fintech directly hurts the banks’ bottom lines
The Asian banking industry give lip service to fintech it should be concerned about how it is taking over its business metrics. While most welcome the developing Financial Technology market, it could erode operating income among Asian banking firms due to the latter’s reliance on payment fees.
According to the Financial Stability Review (FSR) November 2017, an annual report released by the Macroprudential Surveillance Department of the Monetary Authority of Singapore (MAS), the rise in fintech could cause a meltdown in Asian banks, especially those in Singapore, Hong Kong, and South Korea.
This is mainly because these institutions primarily rely on payment income fees to support a good percentage of their operating costs. Should fintech companies continue to disinter-mediate banks in financial services and offer lower transaction and payment fees in Asia, a decline in fees and interest income in the next five years is almost inevitable.
“Banks play a dominant role in financial intermediation in Asia. However, fintech companies are beginning to offer services that disinter-mediate banking services,” the report noted.
The Monetary Authority of Singapore (MAS) is the central bank of Asia’s global financial center, Singapore. It is in charge of all financial institutions in the Lion City, and helps foster and promote a progressive financial sector by keeping in-step with emerging trends and potential vulnerabilities.
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MAS’ new findings, interestingly, stifles the general understanding that this new technology is making nothing but huge strides in improving the financial industry and service accessibility among businesses and consumers.
How will financial technology disrupt Asian banking?
With the proliferation of fintech, startups and established tech companies are offering better payment options to users; directly competing with bank-issued debit and credit cards. According to the FSR, this may cause two major changes in Asian banking services that would cause fee income erosion.
First, there will be lower transaction volumes among consumers with the switch to financial technology services from bank-issued payment options.
Second, banks will be forced to lower their Merchant Discount Rate (MDR) to keep in-step with competitive transaction fees offered by FinTech companies and to “preserve remaining bank card consumption.”
These reasons will prove costly for banks, as margin compression and lower operating income will be unavoidable unless they integrate with the changing business models.
The Financial Stability Review notes that operating income for Hong Kong banks could be displaced by as much as seven percent, while Korea and Singapore follow at more than a five percent drop.
“We find that the FinTech challenge is generally more significant in the payments than in the deposit and lending business. This is especially so for banks in Hong Kong, Korea, and Singapore, given their greater reliance on payment fee income,” the FSR explained.
It is worth noting that these economies are more likely to be affected than other Asian countries due to the high credit card penetration in these countries.
Net Interest Income from Deposit and Lending
While income in the payments department are most affected, net interest income in the deposit and lending business may also take a hit in a worst-case scenario. According to the report, pure play digital banks could entice more consumers with their lower deposit rates.
Should consumers jump ship, this will impose troubles not only on fees accumulated but their deposit funding bases as well. This debacle may result in higher funding costs to offer higher deposit rates or worse, funding through the interbank market.
Then there’s the problem on lending volumes with lower funding, which again, would affect the banks’ interest incomes.
It’s worth noting that pure play digital banks offer similar services with traditional banks but operate at significantly lower costs. Some of these digital banks that have been torching the way are doing great in other continents.
These include Atom Bank and Monese from the UK, with services purely based online.
Two African companies have also made it to the Financial IT Magazine’s Top 50 Digital Banks of 2017 — Kudimoney and Bettr Finance. Both offer banking on consumer’s fingertips.
“At Kudimoney we are committed to developing a digital platform that ultimately makes banking easier and more affordable for Nigerians and Africans,” Founder and CEO Babs Ogundeyi told Nigerian Communications Week.
Proving MAS’ points to be true, Ogundeyi added, “By running a more efficient system, we are able to offer customers more value for their money, via higher interest rates on savings and deposits and lower interest rates on loans, all with an effortless banking experience.”
Asian Banks can still escape the downfall
“Banks can, however, overcome fintech disintermediation by building digital capabilities and integrating them into their business models,” FSR explained.
As the annual review noted all the ways that fintech could dismantle traditional banking, MAS also confirmed that not all is left for Asian banks. But only if they will be open to the change.
The report notes that the income loss can be mitigated if banks take action to address the growing fintech business. They can join the bandwagon and start adopting digital banking models, without having to go 100 per cent digital, to help keep up with the trends.
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Of course, the effects of these new banking technologies will differ among banks, depending on several factors — resources, knowledge, and customer bases among others.
However, openness to technology and change could set Asian banks on the path towards better success in the coming years.
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