Future of Banks: how FinTech could disrupt ratings

Technology is shaking the pillars of traditional banking. A new type of competition is emerging from FinTech (technology-enabled, nonbank providers of financial services). Some players have caught on quickly and within a few years of existence have become "unicorns," exceeding market valuations of $1 billion. Globally, FinTech investment more than tripled to about $12 billion in 2014, according to The Economist magazine, and Standard & Poor's expects double that in 2015. The rise of the FinTech sector is a global trend, reaching developed and developing economies alike.

Banks are aware of the danger of a sudden change, given technological "disruptions" in other industries. And they are not standing idly by. They are starting to collaborate and engage by acquiring or partnering with Fintech companies, setting up venture funds to invest in them, and incubating or launching their own digital finance companies. Yet, we have seen that disruptive technological change has eroded the creditworthiness of a large number of incumbents in other industries such as radio broadcasters, bookshops, newspapers, or the paper pulp makers.We believe that the disruptive power of technology can affect not only an industry's revenue base, but also its overall creditworthiness.

The competitive threat of FinTech is not yet disruptive for banks' creditworthiness, but Standard & Poor's believes that its significance will grow in the coming decade.

The unique nature of banking may offer some protection. First, the business is highly regulated and the barriers to entry are high. Second, customers typically build a long-term relationship with their banks, with whom they entrust their money and personal information. But these protections may wear thin.
For the moment, S&P views FinTech as the new competitor on the block, but not yet a game changer for bank ratings.

For that reason, it's not yet a negative rating driver over its rating horizon, which typically extends out to two years. "However, we believe it will increasingly become a force to be reckoned with", says Standard & Poor's. The eventual impact on bank ratings will depend not only on how banks respond to the new competition and the particular vulnerability of their business models, but also on the response by authorities and regulators to FinTech's growing clout.

Source: Standard & Poor's