The Bank of England (BoE) believes that banks are heavily underestimating the threat posed by fintech start-ups. BoE believes that these small businesses could reduce banks’ overdraft revenue, erode payment services fee income, increase liquidity risk and make it harder for lenders to attract and retain customers.
The BoE speculated that banking profitability could take a hit as big as £1 billion from the increased competition, though was keen to make it clear that these were thought experiments and not predictions.
The impact of fintech on the banking industry was included in the central bank’s stress testing scenario for the first time ever this year.
Speaking at a press conference on Tuesday, Bank of England governor Mark Carney said that banks “took the good from financial technology and said that will help drive down their costs” when asked about the impact on their businesses. But he questioned their “basic assumption” that fintech will allow established banks to lower the cost of acquiring and maintaining customers as it lowers costs.
“Actually, from a consumer perspective, this is potentially a very exciting environment,” he said, suggesting customers could switch banks more often and therefore push up their cost of business for traditional lenders.
The BoE made it clear that they remain supportive of the fintech sector which the government sees as a key service to export post-Brexit.