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Banks are “underestimating” fintech threat, warns Bank of England

By Daniel Lanyon on 28th November 2017

Investment in fintech has reached an all time in recent months. 


The UK’s beleaguered big banks' profitability and risk profiles may be under threat to the from disruptive fintech firms, according to the Bank of England , which adds many not fully aware of the severity of the threat.


In publishing its latest stress testing on the UK’s seven largest banks which included a scenario of a 7-year downturn in part instigated by digital disruption, the governor of the central bank Mark Carney said app-based fintechs could dramatically take market share from incumbents.


The UK’s largest banks are: HSBC, Barclays, Lloyds, RBS, Santander UK, Standard Chartered and Nationwide.


One major headwind to large banks’ profitability, the BoE said, is competitive pressure from smaller banks and from non‑banks in retail banking, in part facilitated by an expansion in the use of fintech.


The BoE has identified three important risks to the banks’ projections of future profits.


“First, competitive pressures enabled by fintech, and in particular the emergence of Open Banking, may cause greater and faster disruption to banks’ business models than banks project.”


“Second, banks are projecting large reductions in costs and there is a risk that they will be unable to execute these plans fully while delivering a broad range of services, particularly given that the cost of maintaining and acquiring customers may be higher in the scenario.”


“Third, in an environment of low growth and low interest rates the equity risk premium may be higher than banks expect.”


Banks could see a reduction in key areas such as demand for overdrafts, cross-selling as well as customer-retention. 


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