When will fintech finally lower banking fees?
by Kylene Casanova
An article in today's Financial Times – Good news - fintech could disrupt finance – by Martin Wolf, the paper's associate editor and chief economics commentator, contemplates fintech disruption in the banking industry with hopeful anticipation, not least, he says, because: “Banking seems inefficient, costly, riddled with conflicts of interest, prone to unethical behaviour, and, not least, able to generate huge crises.”
A fair point. Then when you consider the banking industry's business model and how little it has changed over the past century, it becomes even more clear that fintech, far from being a feared 'disrupter', is about to do us all a huge favour.
There are exciting disrupters on the horizon, such as mobile payments, blockchain, virtual currencies and big data. But, since 1900, the advent of computers, the Internet and the Cloud have done very little to change the unit cost of financial intermediation. That means that, in the past century, the extraordinary technological advances we have seen have not helped financial institutions to lower the cost of providing their services. Why is another matter.
But it also turns out that banks are among the biggest IT spenders in terms of percentage of revenues, spending approximately double on IT compared to sectors such as government, media, insurance and healthcare, according to Deutsche Bank data from 2012. In 2010, European banks spent 10.5 per cent of revenues on IT costs.
So far, this IT spend may have translated into streamlined processes, fewer manual jobs and online customer services. But, to repeat the point, costs to clients have remained stable.
This could change, writes Wolf, with greater technological transformations on the way particularly in payments. Real-time settlement via distributed ledgers is one possibility that could enable improved record-keeping and instantaneous settlement. Banks are also facing disintermediation from peer-to-peer lending platforms, although these developments would go hand-in-hand with huge security issues. Summing up, Wolf writes that there are large opportunities for IT to revolutionise the banking sector but there are still no guarantees that the cost of intermediation will fall: “The difficulty might rather be to ensure that the benefits accrue this time to the public rather than to a small number of incumbents or even to their more dynamic replacements.”
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I don’t really think that fintechs in general will be a driver for the lowering of banking fees.
For one, many “great” innovations from the fintech world are about adding more intermediaries to a payments process (best example: wallets like Apple Pay), adding one more mouth to feed usually does not drive down cost.
Also, many of the “benefits” that fintechs provide are often based on them having to meet lower regulatory standards than the banks. Example: KYC procedures that are less strict for a payment service provider like e.g. PayPal compared to a bank maintaining accounts. Sooner or later regulations will catch up when fintech services mature, adding the same cost that banks have to bear.
And to be honest, the complaint is a little bit unreasonable in the first place. For the majority of banking clients, especially the corporate target group of this website, banking fees have significantly declined over the past years. As the article already points out, banks are spending significant money in IT to further develop services. This is often not marketed as spectacularly (and covered as much by the press) as some fintech coming up with another idea of how they could intermediate the communication between banks and clients, but it usually happens on a large scale. Also, there are - especially in the EU and associated markets - significant regulatory initiatives driving down pricing, most prominently PSD and PSD II. Do you remember how expensive a payment from France to Italy or Germany to Belgium was before the introduction of SEPA?
And last but not least, there is fierce competition between cash management providers which has significantly reduced the cost of banking services for corporates.