BoE says banks may be underestimating fintech threat

LONDON (Reuters) - Britain’s banks may be overstating their ability to stop “fintech” firms stealing customers and eating into profits, the Bank of England (BoE) said on Tuesday.

The BoE was publishing the results of its 2017 stress test of seven major banks: HSBC, Barclays, Lloyds, RBS, Santander UK, Standard Chartered and Nationwide.

For the first time, it included an “exploratory” scenario on how lenders would cope with a seven-year downturn and competition from financial technology - or fintech - firms.

Fintechs offer payment services and aggregate different bank accounts and balances via smartphone apps. New European Union rules from January will make it easier for them to compete with banks.

Fintech is creating opportunities for customers and businesses, BoE Governor Mark Carney said.

“In the process, however, it could also have profound consequences for the business models of incumbent banks,” Carney told a news conference.

The BoE said the banks tested concluded they could cope with prolonged low growth and fintech competition without making big changes to business models or taking on more risk.

The emergence of fintech, however, may cause “greater and faster disruption” to banks’ business models than the banks themselves project, the BoE said.

Fintechs may make it easier for customers to manage their money more effectively to avoid costly overdrafts. They could also direct customers to cheaper credit and avoid going into the red.

“These dynamics seem likely to impact both the quantity and price of banks’ overdraft products, which could lead to a material reduction in their profitability,” the BoE said.

Overdraft revenues contribute 2.6 billion pounds ($3.5 billion)to annual pretax profits at major UK banks, it added. Banks could also lose to fintechs some of the 800 million pounds in fees they charge for providing payments services.

Fintechs may also break or weaken the link between a bank and its customer.

“For instance, in the future, it may be possible for a customer to manage their finances with only minimal direct engagement with their banks.”

Stiffer competition from fintechs means that banks could have to double spending on marketing and cut their aggregate annual pretax profit by a billion pounds.

The BoE said banks in the test may also have overstated their ability to slash costs to maintain steady returns on equity to investors and keep offering a broad range of services.

“Supervisors will now discuss the results of the exercise with banks, including the potential implications of these risks,” the BoE said.