FinTech and challenger banks rapidly changing financial landscape

07 November 2018 4 min. read

Newcomers in the UK financial services sector are eating into the market share of traditional banks at an unprecedented rate, according to a new study. While banks have long tended to shrug off threats from FinTech up-starts, research has found that FinTechs in particular are forging a quiet revolution in the banking industry.

As new challenger banks and FinTechs attack business models across the banking landscape, newcomers are rapidly making inroads into the sector’s profits by offering agile, digitalised alternatives. In retail banking, the trend is visible across the value chain, from customer contact and lending to mortgages, payments and alternative financing. While this has pushed many banks to team up with FinTechs in order to head off new, digitally capable competitors, however, a new survey from Accenture has found they still underestimate the threat of FinTech competitors.

Accenture’s research attempted to quantify the level of change in the global banking industry structure, based on more than 20,000 banking and payments institutions across seven markets, including Australia, Brazil, Canada, China, the EU, the UK, and the US. The results found that a huge 17% of industry players in 2017 had only entered the industry over the last 13 years. This news comes not only because of the boom of new challengers in the sector, but a collapse of a multitude of previous financial institutions – something which should send out alarm bells for the surviving traditional players.

In 2005, there were 24,000 players in the worldwide banking industry, however the financial crisis and digital innovation have since altered the landscape significantly. Thanks to an exit of some 8,300 players, contrasting with an arrival of 600 FinTechs, 1,900 payment institutions, 700 banks licensed after 2005, and 400 subsidiaries of incumbent banks being created in a bid to separate risk at major financial players after the 2008 global crash, 19,300 banking sector players exist now.

Global change

These new entrants have accumulated up to one-third of new revenue, according to Accenture, but the impact of these companies is different across regions. In countries where corruption continues to take root, or where state regulation is so stringent that innovation is often stifled, this growth is notably slower.

For example, in Brazil, newcomers account for only 7% of the market. Meanwhile, China sees the same level of entries, albeit in a much larger market. At the same time, however, it is worth noting that despite this proportionally low saturation, digitised entrants have had a major impact on the banking sector. Fintech's impact in China has seen Ant Financial, the digital-payments arm of Alibaba, and WeChat Pay, from the social-media platform, draw a combined 94% of the country's mobile-payments market with more than 1.3 billion active users.

The UK, however, remains a leading hub in terms of FinTech development and implementation. With the Government having launched a crypto-assets task force earlier in 2018, as well as developing a FinTech regulatory sandbox, new entrants accounted for 63% of the financial players in Britain. These players captured nearly 14% of total banking and payment revenue last year, according to Accenture. This places the segment well ahead of the US’ increasingly archaic banking system.

Stateside, around 19% of financial companies in 2017 were new entrants, and made up only 3.5% of the more than $1 trillion in banking and payment revenue. The researchers primarily blamed this on regulatory hurdles in the country, which have made it more difficult for new entrants to break into the established industry, fostering a relatively stable environment for incumbents. Were these barriers to change, then the US market might more closely resemble that of Canada, which saw a much larger penetration of its market by newcomers.

Commenting on the results, the authors concluded, “The stars have aligned: new entrants are here, material revenue is beginning to shift, and it is all beginning to happen at increasing speed. Banks must act before it is too late, rotating quickly to their new model to compete in a fragmented, highly competitive and open landscape.”