The showdown between banks and fintechs will not take place. Decryption with our expert Guillaume Almeras, founder of the Score Advisor monitoring and advisory site.
In his Global Banking Annual Review 2021 , the international consulting firm McKinsey gives us a new, banking version of the fight of the Ancients against the Moderns. A score that has been played a lot for over ten years. A familiar tune: traditional banks will be supplanted by new, more innovative players (fintechs) or diversifying into financial services (Big Techs). Yet even examining the wealth of data McKinsey has gathered fails to believe. It’s time to change the disc.
The argument that the firm is developing is essentially based on the observation that, based on an economic model that consumes a lot of capital, traditional banks, seeing their profitability regularly deteriorates, they find it increasingly difficult to bear the cost of their own funds. While new players are emerging in their markets, often specialized (particularly in payments) and much less greedy in equity, because they do not fall within the framework of regulatory requirements.
This argument is nothing new and, ten years ago, the prospects seemed much clearer: traditional banks seemed hopelessly doomed. It is much more difficult to support him today.
Neither disqualified nor dethroned
During the health crisis, in fact, banks have shown strong resilience. Not without public aid, of course, but in a much more vigorous way than expected. The digital turning point, which the crisis has fostered among their customers (a “turning point” that we no doubt tend to overestimate) has neither disqualified nor dethroned them.
However, over the past two years, another phenomenon has occurred: the over-financing of certain fintechs. It allows some of them to be valued much better now than traditional first-rate banks, as well as to acquire an international stature or, in the United States, to begin to seriously compete with the largest institutions in number of customers.
On the one hand, therefore, banks always firmly rooted in their positions. On the other, conquering unicorns. Everything seems in place for a final fight… which will not take place.
All of McKinsey’s analysis and its calculation of the cost of equity is based on the stock market trajectories of the main banks. Which has recovered but remains rather unflattering, the banks offering a “decent but unattractive” profitability profile. On the other hand, fintechs are massively attracting investors. And that will eventually continue on the stock market, McKinsey interestingly predicts, as wealth is changing hands with age, from boomers and their elders, to Gen Xers and Millennials, who have other assessment criteria in terms of financial services.
Fintechs, a bubble?
In fact, in the long term, the question of the need for a stock exchange presence for a certain number of banks will no doubt arise. But when, a few pages of the report later, we discover that in the most advanced countries, fintechs have been able to capture 30% and more of customers , while only achieving 5% at best of overall banking income, the favor they are currently enjoying from investors simply looks like a bubble – some observers hesitate besides more to say it .
In any case, these figures invite to formulate a diagnosis appreciably different from that delivered by McKinsey. The profitability of traditional banks is sagging but the new players are even less profitable. Neither one nor the other has in fact been able to renew the banking economic model. Ball in the center!
From here 2025, McKinsey predicts a ROE (for return on equity or profitability of average bank equity) between 7% and 12%, for a cost of equity of 10%. However, what this announces is not a fight of the Ancients against the Moderns but a much more fragmented landscape, within which certain establishments – new but also old – will distance themselves more and more from the others.
What do we see already? Investment banks expanding into retail banking (Goldman Sachs). Classic banks trying to reinvent retail banking (JP Morgan Chase) and others increasingly abandoning this market (HSBC). Technological players creating new financial distribution networks, as well as partnerships through the cloud, rather than replacing banks (Google, Amazon). New players in mass banking immediately gaining international stature before diversifying (Klarna). Stock market variables are not enough to realize what is happening.
By Guillaume Alméras, founder of the Score Advisor monitoring and advice site