EU watchdog says some banks too plodding to win fintech race

FILE PHOTO: A European Union flags flutters outside the EU Commission headquarters in Brussels, Belgium June 20, 2018. REUTERS/Yves Herman

LONDON (Reuters) – Banks saddled with bad loans risk being left behind by nimbler upstarts and Big Tech in the rapidly evolving fintech race, the European Union’s banking watchdog said on Tuesday.

The European Banking Authority (EBA) looked at the risks and opportunities from fintech and its impact on the business models of long established lenders. Fintech refers to using smartphone technology like apps for financial transactions and payments.

Risks to banking profitability depend on how well banks adapt to what customers want, and whether they are weighed down by books of souring loans or hindered by old technology, the EBA said in a report on its findings.

“This is particularly challenging for some large complex incumbents that have a very formal and slow governance structure, further restricted by legacy ICT systems or legacy non-performing assets,” it said.

It divided unnamed banks into three baskets: proactive front-runners with aggressive strategies; reactive “followers” who take a “wait and see” approach; and passive “reluctant to change” lenders left behind, many focusing on whittling down stockpiles of bad loans.

London has long been the main fintech center in Europe but Britain’s departure from the EU next March has spurred Berlin, Paris, Luxembourg and other centers to offer sweeteners to British fintech firms to relocate.

While the EBA is developing its knowledge of fintech, there is no rush in the EU to slap heavy new rules on a sector that promises growth and jobs – and is still tiny compared with the main banking system.

Meanwhile, banks worry that deep-pocketed tech giants like Google, Facebook or Amazon will use their huge retail footprints to scoop up millions of new financial services customers.

“Incumbent institutions consider that BigTech firms have the potential to become significant competitors in the provision of financial services, as is evident from their increasing footprint in the financial sector,” the report added.

But at this stage, fintech firms do not seem to be in direct competition with established banks, despite the fact that some fintechs are reaching maturity in terms of scale of operation and profitability, the EBA said.

“Nevertheless, the competition among incumbents appears to be growing as a result of the fast-paced technological development and many institutions competing to achieve the first-mover advantage.

“At this point, the predominant type of relationship between incumbent institutions and fintech is partnership and collaboration with fintech firms,” said the report.

The benefits to banks of investing in fintech have yet to translate into lower costs and higher revenues as they “struggle to quantify and trace the outcomes of innovative solutions”, it said. “This could indicate that the effects of fintech on incumbent credit institutions are not material at this stage.”