The Bank of England (BoE) warned Tuesday (Nov. 28) that U.K.-based banks may be doing some boasting when they say they can stop FinTechs from stealing customers and profits, but in reality, it could be a big overstatement.
According to a Reuters news report, when the BoE published the results of its 2017 stress test of the big banks – including HSBC, Barclays, Lloyds, Royal Bank of Scotland, Santander UK, Standard Chartered and Nationwide – they included a scenario in which lenders would deal with a seven-year downturn and increased competition from FinTechs. The test found the big banks could handle low growth over a prolonged period of time and competition from FinTechs without having to overhaul their business models or take on more risk.
However, FinTechs may also create “greater and faster disruption” to their business models than the bank’s project, the BOE said. For example, FinTechs could help consumers manage their money better and thus avoid potentially costly overdraft fees.
“These dynamics seem likely to impact both the quantity and price of banks’ overdraft products, which could lead to a material reduction in their profitability,” the BoE said. The report noted that overdraft fees contributed around $3.5 billion to annual pre-tax profits of the major U.K. bank. The big banks could also lose the fees they get from providing payment services, thanks to FinTechs.
On top of all that, there is the risk that FinTechs could break the bond between a bank and its customers. “For instance, in the future, it may be possible for a customer to manage their finances with only minimal direct engagement with their banks,” the BOE said.
The new scenario in this year’s stress test comes as the U.K., despite Brexit, is still a leader in FinTech. Research published in September in the Z/Yen Global Financial Centres Index (GFCI), and reported in Reuters, found that London remained the world’s top financial hub, surpassing New York City, Hong Kong and Singapore – despite market volatility and uncertainty over Brexit. Not only that, but according to the GFCI, London outscored New York City, the survey’s runner-up, by a whopping 24 points.