The Rise Of Nonbanking Companies

The Rise Of Nonbanking Companies

Fintech industry is creating new financial “ecosystems” that reduce customers` costs, increase convenience and change expectations in the field.

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Financial technology or fintech industry, as well as digital companies are creating new financial “ecosystems” that reduce customers` costs, increase convenience and change expectations in the field.

In a recent report, financial services company McKinsey&Company, concluded that traditional financing institutions like banks are subject to the so-called “digital threat”. Retail and corporate customers are starting to switch their banking to digital companies at the same rate that people have adopted new technologies in the past.

The new rivals

Industry leaders like Tencent, Alibaba and Amazon are blurring the traditional boundaries of the industry by offering a wide range of products to their loyal customers. For example, Alibaba is not just an enormous e-commerce company. Also, the company is an asset manager, lender, payment company, B2B service, and a ride-hailing provider. In a similar way, Tencent makes advancements from a chat-service base, whereas Amazon continues to move into cloud services, logistics, media, consumer electronics, and old-fashioned brick-and-mortar retailing-and lending and factoring for small and medium-size enterprises, as the report pointed out.

Another example might be given with Rakuten Ichiba, Japan`s largerst and first online retail marketplace. The business provides loyalty points and e-money usable at hundreds of thousands of stores, virtual and real. Moreover, the company is issuing credit cards, offers financial products and services, as well as claims to be one of Japan`s largest online travel portals. Additionally, they run Viber, an instant-messaging app with around 800 million users worldwide. This versatility should be considered by traditional financial institutions because platform companies are increasingly dominating the distribution end of multiple business ventures.

McKinsey&Company provided some hard numbers proving that such companies are not just a distant threat to banks. They calculated the value at stake for global banking should platform companies successfully split banking in two, finding that “manufacturing”, the main businesses of financing and lending, generated 53 percent of industry revenues, but only 35 percent of profits, with a return on equity (ROE) of 4.4 percent. On the other hand, “distribution”, the origination and sales side of banking, produced 47 percent of revenues and 65 percent of profits, with an ROE of 20 percent.

“As platform companies extend their tentacles into banking, it is the rich returns of the distribution business they are targeting. And in many cases, they are better positioned for distribution than banks are.”, as the report claimed.

Facing the threat

These new ecosystems that feature big digital companies could evenually reshape the global economy. They might emerge in different markets, but with different pace and reach. However, this will place banks at an important crossroad, as the report pointed out:

“As ecosystems emerge, should banks beat them or join them? The odds are seemingly against banks’ ability to get the jump on the world’s most advanced tech companies.”

Nevertheless, it is noted that banks indeed have some advantages on their side. Customers are now preferring to place their money in a traditional bank rather than a technology company, as research shows. Following from this, banks have hold on valuable customer data.

But it is difficult to imagine banks developing platform capabilities with the idea to offer a range of services just like their digital counterparts. If they wish to do so, banks would have to harness the digital side of things, and thus make use of data-driven marketing, robotic process automation, application programming interfaces and apps, a digital workbench for sellers, the cloud, and all other innovative solutions that have sprung in the recent years, as the report highlighted.

Giving recommendations to banks, the research stated that the ecosystem strategy is not applicable to every bank, but it appears to be the key to a bright digital future for many of them.

The full report is available here.

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