Britain's biggest banks nervously opened their latest stress test results yesterday.
They all passed, although Barclays and Royal Bank of Scotland remain the laggards – seeing the Bank of England after class. Most hearteningly, the BoE gave Britain’s major lenders an A grade for their resilience even in the face of a “disorderly Brexit”.
However, while Brexit dominates the headlines for obvious reasons the Bank was also right to point out that it’s really fintech that should make bankers sweat. The Bank’s policymakers made lenders sit an extra “exploratory scenario” this time around investigating the threat of massively increased competition in a low-growth environment.
Executives throughout the banking industry acknowledge that their sector is facing a challenge that’s nothing to do with the goings on in Downing St or Brussels. Nimble fintech firms are threatening to take banks’ lunch money, offering everything from more efficient payments to loan decisions made by artificial intelligence. Banks risk trying to have their cake and eat it, thinking they can take the benefits of automation and cost cutting while resting on their massive market shares.
Cost-to-income ratios can be cut easily from above 70 per cent to below 55 per cent within the next seven years, the banks confidently told the BoE. All while fending off new players with exciting brands who are targeting their most profitable activities, apparently.
If it sounds unlikely that’s because it is. Bank of England governor Mark Carney is sceptical about the banks’ optimistic analysis. Meanwhile there is a real risk fintech firms (not to mention US tech giants waiting in the wings) could win the valuable customer relationship – boosted by pro-competition measures like open banking – and leave banks as little more than back-office utilities.
Taken together, “fintech” in all its diversity represents nothing less than an existential threat to the traditional model of banking.
Carney thinks lenders are not taking the threat seriously enough. It’s a “tough exam question” for banks, he said yesterday. For the big banks, their futures beyond Brexit depend on getting their answers right. For extra marks, show your workings.