Banking a Depressed Business

March 30th, 2016 9:34 pm | by John Jansen |

Moments ago I posted this FT story about rough sledding in Q1 at investment banks. The FT also carries this story which says that competition from financial technology firms will shave employment in the banking business (in Europe and US) by 1.7 million over the next decade.

Via the FT:

European and US banks will cut another 1.7m jobs in the next decade as financial technology companies stalk profitable growth areas such as lending and payments, a new report by Citigroup has predicted.

The 108-page Citi note takes a forensic look at where “fintech” companies are deploying their resources, how much business they have already won and the consequences for the traditional banking industry.

The job cuts — equal to more than 30 per cent of the staff the banks currently employ — come on top of the 730,000 jobs that Citi says US and European banks have already shed from their peak staffing levels.

“Obviously the biggest take out will happen in countries that have been through a crisis or are tech savvy,” said Ronit Ghose, one of the authors of the report.

“In the US, investment banks clearly have selectively cut a lot of people but US consumer banks haven’t cut as much … in Europe there’s been little progress on branch headcount as well.”

The catalyst for the job cuts is twofold. One factor is the new technologies that enable banks to do more online and less in branches. The other is the financial imperative for banks to be leaner as they deal with an onslaught of new competition in their most profitable niches.

Citi’s research found that lending stood out as a key battleground, accounting for 46 per cent of the $19bn in private funding that flowed into fintech during the past six years. The next biggest was payments, accounting for 23 per cent of the investment in fintech.

Lending and payments are both lucrative activities for banks, and losing out on market share is particularly painful when low interest rates are crippling banks’ profitability and low loan demand has made it almost impossible for them to increase revenue.

“So far most of the market value in fintech has been created by companies that are embedded in the still relatively new ecosystem of ecommerce,” the report noted. “For banks in many countries, this is an opportunity lost rather than a loss of existing earnings.”

Protecting lending is most important, since the banks Citi analyses make 56 per cent of their profits from granting loans (compared with just 7 per cent for payments). Citi noted that, despite the relatively high investment by fintech in lending, the scale remains relatively small. Peer-to-peer lending, where platforms such as Funding Club and Lending Circle facilitate investors lending to companies and individuals, accounted for just 1 per cent of global loans, Citi said.

Greg Baxter, global head of digital strategy at Citi, said the trends in western Europe and the US were very different to those in Asia. In the US, new business models had displaced just 2-3 per cent of US consumer banking revenues, and an even lower percentage of US corporate banking. In China “the transition from physical to digital financial flows has been breathtaking”, he said, adding that 96 per cent of China’s e-commerce sales were done without a bank.

Still, the opportunity for fintech in western Europe and the US looks to be enormous, if new entrants can tap it, with Citi suggesting an “addressable market” of $3.2tn for peer-to-peer lending in the US alone.

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