Many banks and asset managers are still working with outdated technologies. In parallel, the rise of innovative neobanks and fintech platforms continues. In his contribution for finews.first, Taimur Hyat takes an assessment.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
Two trends have been reshaping banking and payment services for some time: the rise of neobanks and the rapid evolution of digital fintech platform. Neobanks such as Nubank in Brazil, N26 in Europe, and Chime in the US, operate purely digitally and have several distinct advantages over traditional banks.
First, they are typically subject to less stringent regulatory standards than traditional banks. This is because established banks must comply with much stricter capital, liquidity, and interbank fee regulations. Neobanks have taken advantage of this regulatory asymmetry by serving underbanked populations and expanding the market for financial services – although they might not be afforded this luxury in the future.
Second, digitization enables neobanks to partner with other companies and online platforms. This allows them to more effectively target customers and offer their financial products exactly where the need for their solutions arise. Finally, neobanks do not incur costs for physical branches or outdated IT systems due to their online-only operation. This financial flexibility makes them leaner and better able to address different customer segments compared to traditional banks.
«Established players have seen how dangerous it can be to sit back»
Nevertheless, they pose less of a threat to established, large financial institutions than many believe. This is because neobanks largely target underbanked market segments rather than the high-value consumer and prime business customers that represent the core business of established banks. Furthermore, given their highly focused and segmented approach to customer acquisition, it will likely be difficult for neobanks to scale beyond their narrow customer base.
Established players have also seen how dangerous it can be to sit back. They have witnessed a whole range of retail and manufacturing companies being driven out of the market by tech-savvy newcomers. As a result, established banks have become more agile. They know they can only survive technological disruption if they integrate new technologies into their own business model. Many will be able to successfully integrate – and ultimately profit from – the very technological innovations discovered by neobanks.
«One example is ING Bank’s partnership with Kabbage»
The key to success lies in using new technologies to streamline operations or build new business lines. Key metrics like software depreciation rates and the frequency of tech write-downs are good ways to identify those banks that leverage technology to modernize operations effectively. In Europe, BBVA and Banco Santander are prime examples of banks that are successfully integrating technology. In addition, among the established players, those that use technology-enabled sales strategies to tap into new customer groups will be successful. One example is ING Bank’s partnership with Kabbage, a lender for small businesses.
Robo-advisors developed in the wake of the global financial crisis with the promise of transforming wealth management. Indeed, many market participants still see them as a revolutionary technology that will bring drastic changes to their field, similar to how ETFs disrupted traditional investment management. In reality, what began as a tumultuous revolution in wealth management fizzled out as tech-savvy incumbents captured all the innovative elements of the robo-advisors.
Most of the robo-advisor startups were unable to scale because they lacked a distribution network. This made customer acquisition nearly impossible. Additionally, they offered fairly basic asset allocation and streamlined rebalancing, making it easy for incumbents to replicate their front-end advantages. In other words, robo-advisors have so far been more of a toothless tiger.
«Neobanks can be an attractive investment opportunity»
Instead, established wealth managers have successfully integrated the technological enhancements offered by robo-advisor startups into their business model or even developed their own robo-advisors. This has helped them streamline operations like portfolio construction and rebalancing, as well as create better digital interfaces for customers.
For both public and private equity investors, neobanks can be an attractive investment opportunity with strong growth potential. In particular, they should thrive in emerging markets with underbanked populations and among younger customers who have yet to engage with more traditional banks.
«Traditional banks will not be easily displaced»
This model is also likely to succeed where major retailers, like Walmart, are developing their own online banking services or are cooperating with corresponding neobanks. These kinds of partnerships may help neobanks leverage retailers’ large customer base and provide a distribution network to rapidly scale.
Despite the growth of neobanks and new payment platforms, however, traditional banks will not be easily displaced. Those among them that really embrace innovative technologies, successfully integrate them into their operations and build new digital businesses could provide an even stronger opportunity for investors.
Taimur Hyat is the Chief Operating Officer (COO) for PGIM. He joined PGIM from Credit Suisse Asset Management, where he was global head of Strategy & Product Development, as well as a member of the Operating Committee. Prior to Credit Suisse, he was Head of Joint Ventures and Americas Strategy for Lehman Brothers. Earlier in his career, he was an associate partner at McKinsey in New York. He received a Ph.D. in Economics from Oxford University, where he was also a Lecturer in Economics at St John’s College.
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