MAS warns banks on fintech distruption
(1 December 2017 – Singapore) In its latest Financial Stability Review, Singapore’s central bank has said that regional banks that don’t react to the rising competition from fintech, could see their operating income impacted.
The Monetary Authority of Singapore (MAS) said lenders in the city-state that do nothing to stave off the disruption could face a five percent loss in operating income over the next five years.
Banking and finance sectors including payments, lending, foreign exchange and trade finance have face rapidly rising competition, with the outlook only worsening for traditional banks.
The former has seen more fintech companies offer payment options that compete directly with debit and credit cards issued by banks.
MAS singled out lenders in Hong Kong, South Korea and Singapore as the ones that could be more vulnerable due to their greater reliance on payment fee income.
“The estimated potential reduction in operating income is based on an unmitigated scenario in which banks do not take actions to address the fintech competition. In reality, banks can also harness technology — those that adopt a digital model successfully could perform better compared to those that do not,” it wrote.
“The pace of a bank’s digitalisation would depend on factors such as its ability (in) resources, knowledge, and availability of talent, and openness to adopting technology,” MAS added.
Nonetheless, fintech also presents opportunities for banks to improve their profitability and facilitate potential revenue growth.
In its annual report, the MAS cited figures that suggest cost savings of 30 per cent if banks leverage on fintech in areas such as automating banking functions and using artificial intelligence. That estimation represents 10 to 20 per cent of the operating income of Asian banks.
Fintech could also help banks to reach out to new customers via mobile services, especially in countries with relatively lower financial inclusion, MAS said.
The move towards cashless payments could also benefit lenders if such digital payment platforms are linked to bank-issued cards.
“Just as fintech companies work to resolve pain points for consumers of financial services, it is equally important for policymakers and the industry to work together to identify potential systemic pain points that may inadvertently arise from fintech adoption,” said MAS
“Only then can fintech serve as a sustainable driver of improvements to the financial services industry.”
The central bank’s statements follow exclusive research from East & Partners, which found that some of the world’s largest companies, particularly in Asia, were switching financial providers directly as a result of technology offerings.
According to the exclusive report, titled Financial Technology and the Corporate, around 13 percent of corporates have either partially or fully switched banks in direct response to newly released financial technology solutions, with a further 20 percent currently considering doing so.
China-based firms were found to be the most bullish in their intentions, with nearly one third saying they have in part, or in full switched banks. This compares to the next highest markets – UK (18.2 percent) and Australia (17.4 percent). Meanwhile, less than five percent of French, German and US based corporates report having changed providers off the back of new fintech releases.
The Asia markets of China (29 percent), Hong Kong (19.4 percent) and Singapore (19.1 percent) also reported the highest levels of current consideration in switching banks, indicating that traditional banks and financial institutions in these regions are most under threat.