Banks vs. Fintech: who dares, wins!
Decalia Asset Management is a Geneva based asset manager.
It has been a rough few years for banks. First, the credit crisis destroyed years of profits.
Next, the sovereign debt crisis led to liquidity issues. Finally, regulators forced banks to increase capital, including their equity base.
Seven lean years and a couple of major scandals later, banks were likely hoping to be rewarded with seven years of plenty. Instead, they now watch helplessly as myriads of small, aggressive start-ups harness new technologies to claim a piece of the financial services pie!
This “FinTech” trend takes advantage of three disruptions: first, smart devices enable easy access to service platforms that are relatively cheap to build; second, regulated activities (credit, payments) are opening up; and third, the incumbents’ economic model is vulnerable.
Indeed, universal banks have developed cross-subsidies within their services, a model that appears increasingly outdated.
New FinTech players are slashing prices in the most profitable business lines and leaving the loss-leaders (checking accounts, etc.) to the banks. Nevertheless, banks have not lost the game yet, as they still control millions of clients!
We see two possible scenarios, which guide our investments in financial services, especially in connection to our millennials theme:
• Pharma/biotech scenario: Large incumbents became integrators by acquiring successful biotechs. Major Pharmas thus gained from no longer managing risky, expensive R&D, while the prospect of a nice payoff was an incentive for biotech entrepreneurs.
• Telecom scenario: Some innovative mobile players managed to become majors themselves without being acquired. Prices and margins fell, and large, non-flexible incumbents suffered.
Client acquisition costs will thus likely define the future face of the banking industry.
However, regardless of which scenario unfolds, we believe that Fintech stocks should be relative winners, whether as valuable strategic takeover targets or as successful, cost-efficient industry consolidators.
In that perspective, we favour disruptive bank business models, such as Fineco Bank and Virgin Money, but also innovative leaders in the fast-growing e-payment space.