Incumbent Banks May See Competitive Advantage vs FinTechs Amid Rising Rates

As interest rates rise, and financial services firms must pivot toward new ways of engaging with customers and keeping them in place — and attracting new customers, too — traditional, incumbent financial institutions may have a leg up over their digital upstart competitors.

It’s no secret that the Chimes and the Varos of the world, to name just two examples, have been able to offer a range of financial services, including relatively higher rates on deposit accounts (several basis points above average APY in the industry).

When you start off a low base — or as has been the case through the past few years in banking, a historically low base — it’s at least somewhat easier to offer yield. FinTechs and digital-only firms tend to have a “lighter” operating structure than their omnichannel brethren (with bricks and mortar). But those same firms, whether offering high-yield accounts or buy now, pay later (BNPL) options, have to make sure that the pools of capital available (through retail or institutional investors, through securitizations or funding rounds) are in place.  That may be a harder endeavor if investors start chasing yield elsewhere.

Seen it All? 

In the meantime, the traditional banks, which in many cases have been around and operating for decades, through all permutations of economic volatility, have  access to capital through deposits and customer relationships that also can stretch back across decades. As the Fed continues to hike rates through the next several months — having boosted rates last week by 25 basis points for the first time since 2018 — profitability may prove elusive for the challengers, as inflation and rising labor costs continue to crimp margins, which would offset, at least a bit, revenues from lending and other revenue lines that would be positively impacted by higher interest rates.

It’s important to note that trust remains a key advantage for banks; PYMNTS’ data show that 70% of consumers have high levels of trust in their current, incumbent providers.

That may give banks a leg up as they craft, or fine-tune, their digital offerings even as they gird to pay out higher rates on lending/other products and services.

As noted in this space within the past week, banks have a greenfield opportunity to gain some ground in a space that has thus far been dominated by smaller, tech-focused players: BNPL offerings.

Banks that respond to this consumer interest will be entering a market that already appeals to more than half of United States consumers, as 52% say they are interested in using BNPL options, according to recent PYMNTS research. That opportunity comes as about two-thirds of consumers, overall, that have been using BNPL use it more often than they did a year ago. More than half of those respondents say that trust is critical when considering how they use short-term credit, and who they want to get that credit from. We’ll see, in the months ahead, how age and experience (through the banks) fare against youth and apps (the FinTechs).

Read also: Banks Can Use Customer Trust Advantage to Take Leading Role in BNPL Market