Europe's financial sector is "not the fintechs' to win; it is the banks' to lose," according to Scope Insights.
Financial technology companies are still a "marginal" part of the wider financial services market and banks should be able to withstand competition from them, but only if they invest wisely in their own IT, Sam Theodore, managing director at Scope Insights, the research division of rating agency Scope, said during an Oct. 1 analyst presentation.
"Different from the dynamics in other parts of the world, the fintech/neobank challenge remains more marginal for most of the European incumbents, many of which in fact view it as a new opportunity," he said.
But banks will need to "speedily adjust their business models, cultures and cost structures to the digital age to meet changing customer behavior," which is something that not all will be able to do, he said.
Unproven business models
Europe, particularly the U.K. and Germany, has become a "vibrant ground" for challengers such as N26 GmbH, Revolut Ltd., Monzo Bank Ltd. and Starling Bank Ltd. But these new players have yet to prove they can be profitable, which prevents their business models being fully credible, Theodore said.
His comments come as Revolut, a digital-only bank focused on offering cheap or free transactions, reported losses of almost £33 million in 2018.
Customers in Europe are broadly happy with the service they already get from their banks, and are unlikely to move unless they are dissatisfied with their bank's mobile app, he added.
According to a recent Mastercard survey, 63% of banking apps in use among European customers are from incumbent banks, compared with 26% from social media and 20% from digital-only banks, Theodore said.
Banks looking to profit from the rise of fintechs and challengers may want to build up their "banking as a service" model, the analyst said. Banking as a service, or white labeling, involves banks providing core infrastructure to third parties such as fintechs on which they can build their own products and services.
Banco Bilbao Vizcaya Argentaria SA is one lender that has gone down this route, he pointed out. The Spanish bank launched its banking-as-a-service platform in the U.S. in 2018.
"We will see the use of this business model increasing," Theodore said.
Banks digitizing quickly
Separately, Moody's said incumbent banks in the U.K. are quickly digitizing services in order to see off competition from fintechs and challenger banks.
"U.K. regulators have authorized 41 new lenders since 2013, including four digital-only banks, and there are also an estimated 1,600 fintechs operating in the country," Arif Bekiroglu, vice president and senior analyst at Moody's, said Oct. 2.
"These challengers have taken market share from incumbent banks in payment services, and they look set to benefit further from the 2018 Open Banking initiative, which gives third parties conditional access to established banks' customer data," he said.
Open Banking came into force in January 2018.
But like Scope Insights, Moody's notes that fintechs and challengers have only made a limited impact on financial services in the U.K. so far.
"Despite their early success in payment services, digital banks and fintechs have made no significant inroads so far into the market for core banking services such as deposit taking. Just 12% of the U.K. population have switched to a digital-only bank, and 47% of those who use them hold less than £1,000 in their digital bank accounts," Bekiroglu said, adding that incumbent banks had been defending their position by improving their digital offering and "selectively" partnering with fintechs.
