Years after the 2007-2009 financial crisis and European debt crisis, the European Union's (EU) banking system sustained persistent strain due to those two shocks, austerity and economic contraction, political events, poor banking operations, enhanced regulation, and litigation. The European Central Bank's response was significant: short-term interest rates collapsed and markets were flooded with money via quantitative easing programs. Consequently, investors fled risky assets for the safety of government debt. Yet as banks recovered, savers sacrificed asymmetrically: yields on bank deposits and bonds were decimated. As macroeconomic challenges subsided, Fintech increasingly threatened legacy financial institutions' business models to the benefit of the EU savings public. This study assesses the impact by Fintech companies on legacy banks in the EU with respect to savings, lending, and wealth management. This study also assesses and makes recommendations on a strategy by Fintech to benefit savers, and the measures legacy institutions must take to survive amidst this new competitive landscape.
TopIntroduction
The EU financial system emerged weakened after the Euro Debt and 2007-2009 Global Financial Crisis: institutions failed, new capitalization buffers emerged, and a still-evolving regulatory framework bemoaned the banking power among fewer large institutions. The end of the Euro Debt and US Financial Crises coincided with the rise of the Fintech industry. Fintech (a combination of the words “finance” and “technology”) refers to the use of technology hardware and software to perform banking and financial services such as money transfers, payments, banking transactions, wealth management, and insurance. For diversified European financial institutions, traditional banking functions (i.e. wealth management, payments, savings, deposits) serve as steady revenue sources to dampen highly volatile business lines like trading and investment banking. Despite lower returns on equity for traditional banks versus investment banks, traditional banking functions are increasingly important in the aftermath of the Global Financial Crisis. Even investment banks, such as Goldman Sachs, shifted resources toward retail lending to offset the volatility of trading and non-interest income. This project investigates the vulnerability of major legacy (existing) financial institutions to Fintech software companies, barriers for Fintech, and the effects of Fintech on EU savers and investors.
Over 5000 businesses worldwide are categorized as Fintech firms (Dietz, Khanna, Olanrewaju, & Rajgopal, 2015), this project focuses on savings and wealth management firms in the EU-28 (Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom). The UK is included despite uncertainty regarding the United Kingdom’s Brexit procedure under Article 50 as of this publication. Fintech companies provide compelling product offerings for savers, promote financial service imitation, and squeeze margins for legacy banks and wealth managers. Success by Fintech firms will be a double-edged sword: while some may carve out viable and profitable businesses, M&A (mergers & acquisition) will be spurred by early Fintech investors looking to cash out, the need to achieve scale to effectively rival legacy banks, and transactions by banks who seek to purchase services more effectively rather than develop such services organically. This study proposes that effects on EU retail customers will be somewhat muted due to M&A and evolving regulations at the EU- and individual member-state level. Fintech will impact savings and wealth management by making clients align the value of services and features towards performance.
This study is comprised of five other sections: (1) Background including an overview of savings and wealth management Fintech products; (2) An outline of stakeholders involved in Fintech’s rise and proliferation; (3) Description of the EU’s market, its growth, opportunities, and challenges including cultural, and demographic features of the EU pertaining to the movement of people and money; (4) Identification of the main threats to existing/legacy financial institutions including major EU institutions such as HSBC, Banco Santander, Deutsche Bank, Lloyds, ING; (6) A summary of why Fintech may not completely upend the banking industry but make positive contributions to retail savers and investors.