Thursday 19 May 2016 5:21 pm

The four things which could tip the scales in favour of fintech startups over banks

Banks can breath a sigh of relief.

Fintech isn't going to make them obsolete any time soon, according to Moody's, but there are four things to look out for that have the potential to swing that balance in the other direction.

There won't be a major shock of disruption from fintech, the credit agency has said in a new report, but, banks should instead prepare themselves for a gentler "transformation". The demands from those pesky millennials for banking via apps, snapchat, emojis and whatever comes next, will take time to become the dominant force, giving the big banks plenty of time to adapt.

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"Millennials lag prior generations along a number of indicators important to financial services firms, including lower household formation and home buying rates, higher student loan burdens, lower earnings and higher debt-to-income ratios," said Moody's senior vice president Robard Williams.

"Banks will certainly need to transform to appeal to this generation and counter fintech's rise, but many incumbents have made significant steps towards implementing their own digital strategies and they have some time before the full transformation is complete."

However, there are some factors it flags which have the potential to tip the scales in favour of fintech – the entry of a major technology firm into the fintech space or the launch of a so-called killer app.

These could change the "rules of engagement", as could open data and a more defined regulatory stance drastically shifting the financial landscape.

It cites Alibaba's move into finance with Ant financial, which raised $4.5bn (£3bn) in a new round of funding just weeks ago which values it at $60bn ahead of an expected IPO, but added: "To date, the largest consumer technology firms have largely stayed out of fintech."

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However, Moody's believes a "major competitive reversal for banks is unlikely", and as the incumbent, banks hold several competitive advantages over the upstarts – a large customer bases, deep client relationships, long lending histories and experience navigating regulatory bodies.

"For banks, being traditional players in the space remains a significant competitive advantage, but it also means they have the resources to build internally or acquire to establish a presence on new platforms," said Williams.

The report concludes:

"… it is clear that traditional banks will need to continue to adjust (and invest) in order to remain competitive. But they will have some time, as millennials continue to find their financial footing and become more profitable customers. And banks are not inherently disadvantaged or incapable of the changes that will need to be made to compete as the financial services landscape transforms.

"While it is likely that some firms will lose business and possibly exit certain product/customer segments, still others will thrive in these areas through one or a combination of strategies."