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More than half of financial transactions will be made through financial technology (fintech) companies rather than traditional retail banks by 2020, as the latest European Union (EU) payments directive unleashes competition.
According to an Economist Intelligence Unit report for software company Temenos, the EU’s Second Payment Services Directive (PSD2), which will force banks to provide interfaces, application programming interfaces (APIs) and data to third parties, is set to “tip the scales between banks and fintechs for customer loyalty”.
2016’s edition of the same report found that fintech overtook regulatory tightening as the most pressing trend in the banking industry. This year, it followed the results of a global survey of 200 senior executives at retail banks.
Renee Friedman, report editor at the Economist Intelligence Unit, said: “Banks will increasingly have to adapt their culture and digital strategies to their customers’ needs if they are to compete [with fintechs], not expect their customers to bend to theirs.”
The report concludes that traditional banks must collaborate with fintechs to prosper. Plans to collaborate with fintechs for access to modern technology-driven services seem on the cards as banks appear to have little appetite to spend money on IT. The survey revealed only 17% of retail banks plan to prioritise the modernisation of IT systems.
Meanwhile, collaboration could help fintechs that could hit compliance barriers, through compliance expertise from traditional players.
“PSD2 and open architecture are the game changers. Banks may lose their customers’ loyalty and fintechs could hit compliance barriers. Both must collaborate to survive,” said the report.
Banks also face human resources challenges when it comes to using new technology, which could also make collaboration with fintechs more appealing.
The study found 54% of banks said finding people with the right data skills is one of their biggest challenges, while 49% said it was getting staff to adopt new technologies.
Other key findings from the survey:
- 50% agree the traditional transaction/branch-based banking model will be dead by 2020.
- 74% agree retail banking will be fully automated by 2020.
- 68% agree customers will be willing to forgo human contact if services are cheap or free.
- 42% agree a cyber attack will have caused at least one systemic bank failure.
- 72% agree more payments will flow via fintech firms than through traditional bank networks.
- 71% agree cash will represent less than 5% of all retail transactions.
- 63% agree retail P2P lending will be freely available via banking platforms.
- 69% agree anti-globalisation movements will negatively affect retail banking.
When asked what type of companies would be the biggest competition in the next few years, 61% said payment providers such as PayPal and Apple Pay, while 60% said payment aggregators such as comparison sites, 20% said non-financial firms such as retailers and telcos, and 19% said peer-to-peer lenders.
According to retail bank executives, the business lines most at threat are mortgage lending (40%), consumer finance and loans (40%), and traditional savings and deposits (32%).
David Arnott, CEO at Temenos, said: “New regulation and technology change is driving a shift towards collaboration. Banks with a modern core and an open and flexible architecture will be best placed to seize the advantage and thrive.”