Moody’s Investors Services observed that large banks are investing in their own technology and collaborating and supporting fintechs to acquire new capabilities.
The report highlights that incumbent banks’ focus on residential mortgages, which account for about 75% of total system loans, has created opportunities for fintechs to specialize 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.
At the same time, digital banks are emerging as direct competitors to large institutions, “taking advantage of technology and low operating costs to potentially offer products cheaper than traditional banks while meeting growing consumer demand for digital services”.
The report states that the future position of banks will be determined by their ability to adapt to four drivers of change: changing customer expectations, increasing competition as technology advances and the entry of new players, management of infrastructure and costs with technology and level of support and control from regulators.
Funding constraints and regulations will limit the growth of fintechs, Moody’s said, which could hamper them and pose a threat to banks.
The profitability and ability to maintain asset quality of new fintech lenders have also not been tested, the report adds, because they have not gone through a full economic cycle.
“Fintechs have grown significantly in recent years, leveraging technology to enter segments of unsecured credit to individuals and small businesses that are not merited by incumbent banks, as well as areas that do not require the liquidity and the scale of a bank’s balance sheet, such as payment services. » Daniel Yu, vice president and principal analyst, Moody’s.
“Large incumbent banks have responded to this threat by aggressively pursuing technology development, leveraging their strong financial resources, while smaller banks with limited financial services are more vulnerable to financial technology disruption. »
Notably, NAB Digital Bank collaborated with an artificial intelligence software company to launch the world’s first AI-based assistant for digital home loan applications in February. In August, CBA held the first bond issuance solely using blockchain.
The research adds that open banking will give start-up digital banks access to a wider customer database, creating more opportunities for fintechs to offer more personalized services.
The new system will initially apply to the big four banks, which are required to make product data available from July. Customer data will be available to all institutions from 2020 if the ACCC considers open banking robust.
Regulators support digital banks, but remain skeptical of other fintechs. APRA introduced a regime to grant restricted Authorized Depository Institution (ADI) licenses a year ago, paving the way for fintechs to become ADIs.
Volt was the first neobank to receive an ADI license in January.
ASIC said in a report released in August that it would actively support the sector, expanding its regulatory sandbox to include digital businesses accepting household deposits and offering other retail products.
“If implemented, it will make it easier for fintechs to build their capabilities to implement new products and services,” the Moody’s report said.
Additionally, most fintechs have relied on equity funding from their founders or venture capitalists, the study found, with some companies going public and others using equity crowdfunding. clean.
