Payment methods: Are FinTechs a real threat to banks?
FinTechs such as Bankin and Linxo create relations with their clients that enable customers to bypass banks, by proposing account aggregation and budget management services. With a new European directive on payment services in the pipeline, such companies will be able to go even further.
How does account aggregation threaten to cut banks out of the equation?FinTechs that
specialise in Personal Financial Management (PFM) such as Bankin and
Linxo currently offer quite basic services, often at either a low
cost or at no cost at all. Their mobile applications pool together
bank accounts from different banks, divide transactions into
different expenditure categories (food, travel, leisure etc.) and
alert users when a certain threshold has been broken.
In the future, with
the new European directive on payment services (DSP2), which is set
to enter into force in March 2018, these companies will be able to
benefit from the status of "Third Party Providers (TPP)".
FinTechs will therefore be able to carry out bank transactions such
as bank transfers.
This will bring
about a radical change to the business models of such companies.
Beyond the role of account aggregators, they could become like
comparison websites, thus eroding even further the commercial
relationship that banks have developed with their clients. A client,
for example, will be able to authorise Linxo to find out which
banking institution offers them the cheapest interest rates on their
mortgage, without said institution having any connection to their
To this we can add another threat, that of instant payments?Correct. The
European Central Bank is pressing for instant payments to enter into
force in early 2018. As the name indicates, money transfers will be
almost immediate, without having to wait a minimum of one working
day, and this will be the case 24 hours a day, 7 days a week, 365
days a year. The transaction threshold will be 15,000 euros.
coupled with instant payment will lead FinTech companies to offer
multi-banking services, that is to say money transfers from one bank
account to another in real time. Their target audience will be
individuals but also SMEs, as the latter notably suffer from
difficulties regarding access to liquidity management services.
will be able to shop around, especially in countries such as the UK
where credit ratings are made public. On the basis of a positive
rating, a banking institution knows how much money it can lend to an
individual or a business leader. Inversely, the Bank of France only
collects unfavourable information (negative ratings).
How are banks responding to this? All banks are
exploring the possibility of either offering these kinds of services
themselves, taking over a FinTech company or, at the very least,
forging a partnership with a FinTech.
partnerships between banks and FinTechs are win-win for both sides.
The FinTech company offers an astute understanding of client's
needs and a seamless user experience, whereas the bank brings
security, reliability, longevity and scalability to the relationship.
The stakes for banks
are even more important as the profitability of their products is
dwindling due to historically low interest rates. They cannot afford
to lose clients who are attracted by these types of services.
In the short term,
they can decide to cosy up to FinTechs without having to invest any
of their own funds. Banks are already involved in major projects such
as regulation compliance and transforming their infrastructures.