In its Fintech – Global: Bank of the Future report, Moody’s warned that banks that fail to adopt strategies that strengthen their digital platforms may struggle to maintain their current market position as customers increasingly explore finance alternatives from online lending platforms.
The report cited data from an analysis of the US mortgage market which revealed that 53 per cent of borrowers used online platforms to obtain home loans in 2017.
The figures also revealed that younger borrowers are most likely to obtain loans via an online platform, with 69 per cent of Millennials obtaining finance either fully or partly online, compared to 55 per cent of Generation X and 43 per cent of Baby Boomers.
“Agile incumbent banks that consistently assert digital leadership will thrive and prosper, while laggard banks that lack the vision or resources to develop competitive digital strategies will be disrupted,” the report noted.
“Ageing legacy financial platforms have created opportunities for new nimble entrants to capture a portion of banks’ profits by offering more customer-focused, responsive and efficient channels.”
Moody’s added that the “bank of the future” would cater to high and rapidly evolving customer expectations by integrating enabling technologies, leveraging increasingly mature and dependable digital distribution channels, and applying such tools across multiple businesses and product segments.
Further, Moody’s noted that it expects competition to stiffen between traditional banks, large technology companies and smaller fintechs.
“In the face of these threats, successful incumbent banks will be those that, either on their own or in collaboration with others, pursue aggressive digital transformation to become more efficient and responsive to evolving customer demands,” co-author of the report and Moody’s analyst Fadi Abdel Massih said.
However, Mr Massih claimed that such changes could also undermine the banks’ service proposition.
“Disintermediation of the customer relationship would be a threat to this business model if it ends up reducing banks’ pricing power by transforming them into providers of a ‘back-office’ balance sheet for customer-facing apps/businesses.”
Moody’s also acknowledged that such changes would require “high initial investment”. But it noted that digitisation would enhance efficiency by optimising branch networks, data collection, analysis and reporting.
Moreover, Moody’s assistant vice president-analyst and co-author of the report Megan Fox noted that the rise in “open banking” initiatives and the easing of regulations imposed on new entrants are signs that the landscape is shifting to encourage innovation.
“Regulatory sandboxes and open banking initiatives indicate a shift in authorities’ willingness to encourage innovation and competition,” Ms Fox said.
However, Moody’s said that some new entrants may seek to form partnerships with traditional banks in order to satisfy regulatory requirements.
The credit ratings agency noted that banks would remain subject to such regulatory requirements, while funding white label products offered by their fintech partners.
In her address to the Thomson Reuters Australian Regulatory Summit, CEO of the Australian Banking Association (ABA) Anna Bligh referred to regulatory, technological and consumer-driven change as a “triple whammy” fostering reform in the banking industry.
Ms Bligh suggested that while the banks are undergoing “intense and relentless scrutiny”, there is a “once-in-a-generation opportunity for a major reset”.