Sector challenged amid fintech disruption

Companies across the financial services – banks, insurance, payment and wealth managers – are still transforming into more digitised, customer-focused and flexible businesses, while facing challenges from the rapidly evolving fintech ecosystem. After the global financial meltdown in 2008, the financial industry lived in a low-interest rate environment – or so it thought. After the covid-19 pandemic shock this year, interest rates are at a new all-time low and quantitative easing has been used abundantly by government around the world to fight off the economic effects of lockdowns. Stock markets have so far reacted jubilantly to this new wave of freshly printed cash and have seemed to price in a low-interest-rate recovery and expansion phase for at least over the next few years. Expansion monetary policies coupled with fiscal stimuli should, in theory, benefit the retail banking business but that has not necessarily been the case, due to stricter regulations imposed on the sector. Low interest rates are unfavourable to insurance businesses, according to conventional economic wisdom. The pandemic, in turn, has propelled various fintech businesses ranging from cashless payment operators to online banking to brokerage services. The 2020 Banking Industry Outlook report by consulting and auditing firm Deloitte paints the current situation for the banking industry in grim terms: “The combined effects of technological
 disruption, sweeping changes to the nature of work, demographic shifts, climate change, and possible Japanification [in Europe] could have serious implications for the banking industry. The low-growth scenario, in particular, could result in a drastic reduction in banking capacity, with fewer banks than we have today able to recover their cost of equity. Institutions that lack scale or differentiated capabilities, in most cases, will likely be challenged.” The report notes, however, that despite such challenges, banks will continue to play the important role they always have: “But while the way banking is done changes, banks’ role will likely not. Despite what happens, banks should remain true to their core identity as financial intermediaries: matching demand with supply of capital. Banks’ competitive advantages should continue to be their ability to manage risk and complex financial matters, conducting business in a highly regulated market, driving innovation to serve client needs, protecting clients’ privacy, and maintaining trust, all at scale.” To do so, banks will have to become even more flexible and adaptable to disruption. This could be generally construed as good news for corporate venturing, which will be one of the tools to enable this adaptability. The…

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