Banks Say FinTech Innovation, Not Regulation, Is Now Their Fiercest Market Pressure

The regulatory pressures on banks is not only fierce, it’s also continually changing, forcing financial institutions (FIs) to invest vast resources to stay on top of evolving rules. Regulation has undoubtedly acted as a catalyst to major financial services trends in areas like small business (SMB) lending, faster payments and, most recently, open banking and collaboration with FinTechs.

But according to a new report from EY, it would be unfair to say that regulation is the only driving force behind large banks’ changing market strategies.

In its Global Banking Outlook 2018 survey, EY assessed 221 financial institutions across 29 markets. According to the results, banks argue that innovation, not just regulation, is behind the wheel of progress.

Optimism Up

Regulatory pressures, particularly following the global financial crisis, imposed new stressors on global banks. But today, EY found, financial institutions are looking up. Eighty-five percent of executives surveyed said they predict revenue to increase in the next three years; 12 percent said that growth will be in the double-digits in the next year, hitting 31 percent by 2021.

North American banks are among the most optimistic, EY found. The results are a bit more varied across the Asia-Pacific region, however, which influences how these FIs invest in innovation. Meanwhile, European FIs are notably less optimistic than the rest, researchers found, as they navigate a notoriously heavy-handed regulatory climate.

Further, while revenues are expected to increase, banking professionals are also gearing up for costs to do the same. But the key to this trend is the prediction that banks will reallocate spending from regulatory-related costs to other initiatives.

Competitive Disruption

Banks, of course, cannot ignore the FinTech threat. EY pointed to previous research from its FinTech Adoption Index, released last year, which found that customers are attracted to FinTech offerings thanks to their “simpler, more convenient, more transparent and more readily personalized” services.

“The bottom line,” EY said, “is that banks need to realize that competitive threats are continuing to evolve and prepare to battle these disruptors in the marketplace.”

Analysts noted that the shifting source of market pressures away from regulation and toward FinTech rivals has created a climate in which innovation reigns, forcing banks to design new solutions to retain customers and prevent bank switching.

Nearly two-thirds (62 percent) of banks surveyed said they expect to be fully “digitally matured” by 2020, compared to just 19 percent who said the same last year. This means FIs will not only invest in innovative technologies, but will also have a deep understanding of these tools and how they can improve operations.

More than half of the executives surveyed said they are currently investing in artificial intelligence, cloud technology, cybersecurity, data and analytics, machine learning, mobile technology, omnichannel customer experience, APIs and open platforms and robo-advisor tools — and will continue to invest in these tools in the future.

Cybersecurity

Amid the competitive pressures of FinTech incumbents is another force driving how banks invest in, adopt and implement innovative tools: cybersecurity.

This year, cybersecurity will stand with digital transformation as the highest priorities for FIs around the world, EY’s report found. Nearly 90 percent of survey respondents said the enhancement of data and cybersecurity is their top priority, after coming in at sixth place in 2017.

Anti-money laundering, protection against financial crime and managing reputational and conduct risks are all behind this revamped focus on cybersecurity. But the focus on data protection doesn’t exist in a vacuum: According to FY, banks are having to manage the old pressures with the new — that is, they must navigate evolving cybersecurity regulations and new cybersecurity-related FinTech to become successful with this strategy.

“To meet this challenge,” EY concluded, “banks should plan to collaborate more with their peers and better leverage the ecosystem by sharing data on external cyberattacks, for example.”