Why Fintechs Find Gobbling-up Banks’ Customers Harder Than Nibbling at Them

Philip Ingram,

Philip joined Platinum in 2009 as an investment analyst. Previously, he worked for Merrill Lynch and Morgan Stanley in the UK, analysing the British and Irish banking sectors... More

17 Sep 2018

The promise of the new is always exciting, whether it is Tesla taking on the motor industry or cryptocurrencies challenging the fiat money printed by central banks.  However, an object lesson for investors in the thrill of the new is banks’ resilience to the onslaught from fintech companies.

In 1994 Bill Gates predicted technology would transform even the stodgy old banking sector when he stated, “Banking is necessary, banks are not.”  Back then when the great information superhighway was emerging, such bold visions held immense intuitive appeal for investors.

Yet even after three decades of technological disruption as well as a battering by financial crises, nationalizations and regulators, the market value of the world’s banks is still more than twenty times that of all fintechs.  While there have been a few standout fintech successes like PayPal, they are the exceptions rather than the rule and most of them are in Asia.

As a result, Bill’s prediction was more or less forgotten until the recent frenzy around fintech and developments such as artificial intelligence, big data and blockchain.  Reading the financial press, one could be forgiven for thinking that fintechs are about to do worse things to banks than Amazon has done to bricks-and-mortar retailers.

However, when investors peek behind the hype they are likely to find reality is more nuanced.  Fintechs have struggled to capture banks’ prime customers because the moats of regulation, relationships, data and balance sheets run deep in financial services.

In particular, banks’ size and low cost deposit franchises mean that fintechs cannot compete with the low rates banks are able to offer to prime borrowers.  So it is no surprise that few fintech ventures have been launched in the highly competitive mortgage business or in the provision of personal loans to customers with high credit scores.  This is where banks offer the best rates and already own and know the customer.

Knowing the customer is critical to assessing loan risks.  Banks have much more customer data than fintechs and what they have is more useful than numbers of Facebook ‘Likes’ and Instagram followers.  Banks have holistic views of everything from customers’ sources of income to their daily spending.  This helps them to cross-sell financial products and, most importantly, to minimize bad debts.

Bad debts are the biggest variable cost in banking across the cycle and this helps to explain why disruption in financial services works differently to other industries.  In industries like travel reservations, disruptors like Booking.com and Expedia have succeeded by moving fast to engineer products with lower costs which traditional players find hard to compete with.  However, the start-up mantra of ‘let’s move fast and break things’ is dangerous in banking because it tends to result in high bad debts.  As a result, risk managers and regulators put the brakes on, giving the incumbent banks more time to respond.

Finally, the ‘relationship hassle factor’ is a wide moat in financial services.  Banks’ customers are notoriously loath to switch provider however woeful the service they are getting.  This apathy is doubly challenging for fintechs as most of them only sell one or two products.  Customers typically do not want a different provider relationship for every product as it is a nuisance.  Instead they want the convenience of having all of their accounts in one place.  For example, this is why 85% of Australian SMEs hold all of their business products and most of their owners’ personal ones with the same bank.

This makes customers very tactical in how they use fintechs.  Most of them only use fintechs for special case risky loans for which the banks have already turned them down.  As a result, most fintechs have either partnered with banks or been restricted to niches which banks service poorly or elect not to target.

For example, it is likely the new phenomena of Zipmoney and Afterpay in Australia mostly just extend unsecured debt to youngsters.  This is a niche the banks are wary of lending to, though Westpac took a $40mn stake in Zipmoney in 2017.  Similarly, in Europe Revolt offers cross-border multi-currency cards where banks have hidden fees and frictions in on-boarding customers.

Asia is where most of the fintechs that are not restricted to small niches or bank partnerships are to be found.  In these markets, fintechs were given growth windows in the early stages of their development due to weaker regulation and banks’ focus elsewhere.  In addition, most of the major success stories used massive non-financial businesses to slingshot the growth of their fintechs.

Alibaba’s Ant Financial is a case in point with its likely market value exceeding $150bn.  When online payment portal Alipay was launched in 2004, there was space to grow because neither China’s (then) uncoordinated mish-mash of regulators nor its banks were focused on consumers and SMEs.  Alibaba took its break and leveraged the economic might of its e-commerce business to create a financial behemoth.  AntFinancial is now big and powerful, and thus able to compete with the banks.

So despite the promise of the new, upon closer examination it would appear fintechs are not so much gobbling up banks’ customers as nibbling at them.  Some have been successful at solving specific needs and in certain niches.  However, most have been unable to take over banks’ prime relationships or market shares so easily.

The promise of the new is always exciting, but industry structure, consumer habit and regulation are important and can often work in favor of the incumbents.  Exciting thematics are never a substitute for understanding the complexity of the businesses one invests in.  Decades of banking resilience and the finer points of the interplay between fintechs and incumbents demonstrate this, no matter how compelling Bill’s prediction seemed all of those years ago.

Understanding this is one reason we have confidence in the significant investments we have made for our clients in banks in Eastern Europe, Thailand, India, Korea, Japan and China.  We find the best time to buy banks is typically during a crisis or dislocation.  For example, the early 1990s, after Australia’s credit bubble popped in 1989, proved to be an opportune time to invest in its banks while selling them in 2015 ahead of the ongoing credit tightening, regulatory interference, reputational damage and housing downturn would have been timely.  Selling when it cannot get better and buying when the outlook feels bleak tends to be emotionally difficult, but when based on thorough analysis is financially rewarding.

DISCLAIMER:  Issued by Platinum Investment Management Limited ABN 25 063 565 006 AFSL 221935, trading as Platinum Asset Management (‘Platinum’). The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice or any form of financial product advice. It has not been prepared taking into account any particular investor’s or class of investors’ investment objectives, financial situation or needs, and should not be used as the basis for making investment, financial or other decisions. Before making any investment decision you need to consider (with your professional advisers) your particular investment needs, objectives and financial circumstances. To the extent permitted by law, no liability is accepted by Platinum or any other company in the Platinum Group®, including any of their directors, officers or employees, for any loss or damage arising as a result of any reliance on this information. 

Terms and Conditions

Dated: 1 March 2019
IMPORTANT NOTICE – Please read this important notice before proceeding.

This website, www.platinumworldportfolios.ie, is operated by Platinum World Portfolios PLC, a variable capital investment company incorporated under the laws of Ireland under Registered Number 546481 ("the Company", “we” or “us”).

By proceeding to access, view or download information from this website, you acknowledge that you have read, and agree to be bound by, the following terms and conditions. If you do not agree to these terms and conditions, you must not use this website.

  • Distribution of the information contained on this website in certain jurisdictions may be restricted by law. The information contained on this website is intended only for persons and entities in those jurisdictions where access to such information and use thereof is not contrary to local laws or regulations. Accordingly, all persons who access this website are required to inform themselves and to comply with such restrictions. In addition, this website and its contents have not been prepared for and are not intended for access by US persons as defined in the Securities Act of 1933.
  • For UK persons only: You are about to enter a website which contains information aimed at professional clients within the meaning of Article 4.1(10) of the Markets in Financial Services Directive 2014/65/EU (MiFID II) (“Professional Client”). If you are a UK person, by entering this website you confirm that you are a Professional Client. No UK person other than a Professional Client should act or rely on this website. Platinum UK Asset Management Limited (“PAM UK”), 20 North Audley Street, London W1K 6LX is an appointed representative of Mirabella Advisers LLP, which is authorised and regulated by the Financial Conduct Authority - number 606792.
  • When using this website, you are responsible for complying with all applicable local, national and international laws and regulations, including those related to data privacy and intellectual property. It may be illegal to access or download the information contained on this website in certain jurisdictions and we disclaim all responsibility if you access or download any information from this website in breach of any law or regulation of the jurisdiction in which you reside or from which you are accessing this website.
  • The investment funds, strategies and financial products and services described in this website may not be available in all jurisdictions and may not be available to some or all investors in a certain jurisdiction. Nothing contained on this website constitutes or is intended to constitute an offer or a solicitation to subscribe for, redeem or convert shares in the Company or any of its sub-funds in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. Investments into any fund or sub-fund referred to on this website or any other Platinum product or strategy can only be made through and in accordance with information contained in the relevant offering and subscription documents.
  • The content on this website is provided for general information only. Nothing contained on this website is intended to constitute investment, legal, tax, accounting or other advice. We strongly suggest that investors consult financial and other professional advisers prior to taking, or refraining from, any action on the basis of the content on this website and that you carefully consider your particular investment needs, objectives and financial circumstances. This website does not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making investment, financial or other decisions. The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular investment strategy, security, fund, sub-fund or product, whether or not offered by the Company.
  • The information provided on this website is given in good faith and is believed to be accurate at the time of compilation. The Company may, without notice, amend or remove any information on or from this website at any time. Neither the Company nor any of its directors, officers or agents (including, without limitation, the Company’s investment manager, administrator or custodian) make any representation or warranty as to the accuracy, reliability, timeliness or completeness of the information. To the extent permissible by law, the Company and its directors, officer and agents (including, without limitation, the Company’s investment manager, administrator or custodian) disclaim all liability (whether arising in contract, tort, negligence or otherwise) for any error, omission, loss or damage (whether direct, indirect, consequential or otherwise). To the extent permitted by law, we exclude all conditions, warranties, representations or other terms which may apply to our website or any content on it, whether express or implied.
  • Opinions expressed on this website reflects our views only at the time at which such opinions are expressed and may depend on assumptions or projections that may not prove to be correct or are subject to change.
  • This website may provide information, articles and material, or links to such, that are written or prepared by people who are not associated with the Company. This material is only provided for your interest and convenience. The Company is not responsible for the content or accuracy of this material and any opinion expressed in the material should not be taken as an endorsement, recommendation or opinion of the Company.
  • We do not guarantee that this website, or any content on it, will always be available or be uninterrupted. Access to this website is permitted on a temporary basis. We may suspend, withdraw, discontinue or change all or any part of this website without notice. We will not be liable to you if for any reason this website is unavailable at any time or for any period. You are responsible for making all arrangements necessary for you to have access to this website. You are also responsible for ensuring that all persons who access this website through your internet connection are aware of these terms of use and other applicable terms and conditions, and that they comply with them.
  • Performance figures quoted on this website are past performance. Past performance is not an indicator of future performance. Neither the Company nor any of its directors, officers or agents (including, without limitation, the Company’s investment manager, administrator or custodian) or any associate guarantee or make any representation as to the performance of any of the sub-funds offered by the Company, the maintenance or repayment of capital, the price at which shares in the Company or any of its sub-funds may trade or any particular rate of return.
  • Your acknowledge that neither MSCI Inc. nor any other party involved in or related to compiling, computing or creating any of the MSCI index data referred to on this website makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI Inc., any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI index data is permitted without express written consent of MSCI Inc.
  • You acknowledge and agree that the collection, disclosure or use of information about you from accessing this website is subject to the terms of the Company's Privacy Policy.
  • The Company may from time to time amend the terms and conditions of accessing this website by posting an amended version of this notice on this website. You agree to continue to be bound by any amended terms and conditions and that the Company has no obligation to notify you of such amendments other than by posting an amended version of this notice on this website.
  • The Company owns the copyright in the content contained in this website (other than materials that have been included with the permission of others who own the applicable copyright). You may print a copy of any page for personal or non-commercial purposes provided that you do not remove any copyright notices or any trademarks or logos of the Company or persons or entities associated with it. Except for a purpose or a use permitted by statute, or the prior written consent of the Company, you must not copy, modify, sell, distribute, adapt, publish, frame, reproduce or otherwise use any of the material on this website or trademarks or logos of the Company or persons or entities associated with it.
  • These terms and conditions of use are be governed by and construed in accordance with the laws of Ireland, and you agree to the non-exclusive jurisdiction of the Courts of Ireland.