Commercial Banking: how FinTech startups are creating an impact and changing the landscape

It is news to no one that FinTech startups, enabled by rapidly evolving technological advancement, are disintermediating banks from their customers and changing the financial services landscape as we know it. While this well-known fact is widely indicative as disrupting the industry as a whole, rarely is there a cohesive understanding of what disruptive forces are relevant to specific lines of business; and, more importantly, how to practically respond to them in the face of such change. 

Today’s bank executives are faced with a choice – to compete with emerging startups head on or collaborate with them in ways that the industry has not seen before. The reality is, the companies of tomorrow must successfully do both. 

The Commercial Bank’s value chain is being disrupted, and there is various FinTech startup activity around the world that has the potential to create an impact: spanning from the acquisition of customers, to the origination and servicing of loans, as well as the operating activities and supporting services that the Bank requires to service its commercial clients. 

Using startup trends like the signals of an advance warning radar system, executives can better formulate an innovation thesis that will inform the future focused strategy and approach for Commercial Banking; ultimately helping to decide in which areas to focus – and whether to compete or collaborate. 

Startups in Commercial Banking are focusing their efforts across the entire lending value chain: from Alternative Finance including marketplace lending, to Digital Banks, Collaboration Platforms and Third-Party Enablers, including alternative credit scoring and KYC. 

In order to better understand the trends in relation to the activities most impacting a Commercial Bank’s decision to compete or collaborate, an understanding of the external macroeconomic environment is fundamental:

  • Loan growth hits new European high: Loans to businesses across the Eurozone increased at their fastest rate since the financial crisis in October 2017, underscoring recovery in demand across the EU. 
  • Addressing non-performing loans risk: European banks had non-performing loans worth €1 trillion at the beginning of 2017, amounting to 5.2% of all loans. An outstanding industry risk is the inability of banks to assess and manage loans through comprehensively stratified and data-driven methods.  
  • In 2017, total bank deposits grew, leading to increased competition for deposits, as well as higher cost of deposits which diminishes the margin growth potential of the increased loan demand.
  • Open banking adopted in Europe: The Revised Payment Services Directive (PSD2) was implemented across the EU in January 2018, whereby banks must provide third-party applications access to data through open APIs. This will challenge banks worldwide with new customer expectations of financial offerings. 
  • E-commerce growth in the region: The European e-commerce market was estimated to be worth €602 billion in 2017, with a 14% annual growth rate. The UK had the largest market of all, worth €153 billion. The increasing volume of cross-border transactions means merchants will require commensurately sophisticated credit, payments and trade collaboration facilities.  

Taking these macroeconomic trends and analysing them in relation to FinTech startups operating across Commercial Banking, provides the Bank with better knowledge on what is happening in the Commercial Banking world, and therefore hands them the insight they need to make decisions on where to focus: on competition or collaboration. 

To explore this topic further and for take a deeper look into the most active sub-sectors of startups in line with Commercial Banking, with specific context and strategic interest, join us at our next London Breakfast event on 31st May at TechSpace. Register to join here

By Nektarios Liolios


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