BANKING AND FINTECH: A

CHALLENGE OR OPPORTUNITY?

Inna Romānova and Marina Kudinska

ABSTRACT

Global economy, growing importance of innovations as well as wide use

of technologies have changed the banking business worldwide. Financial
technologies (FinTech) have become an integral part of banking, and
nowadays banks have started to compete beyond financial services facing
increasing competition from nonfinancial institutions providing, for
example, payment services. Start-up service providers, search engines,
and social networks have expanded their services “interfering” in
the fields traditionally covered by banks. The rapid rise of FinTech has
changed the business landscape in banking asking for more innovative
solutions. These recent tendencies require the banks to increase invest-
ment in FinTech, rethink service distribution channels, especially the
business-to-consumers models, increase further standardization of back-
office functions, etc. Some members of the financial services industry see
the boom in FinTech as a threat to traditional banking industry. Others
believe that FinTech has become a challenge that can be turned into an
opportunity as it provides more flexibility, better functionality in some
areas, and aggregation of services. The aim of the paper is to analyze the
recent trends in banking, identifying opportunities and risks of FinTech

Contemporary Issues in Finance: Current Challenges from Across Europe

Contemporary Studies in Economic and Financial Analysis, Volume 98, 21 35
Copyright r 2017 by Emerald Group Publishing Limited
All rights of reproduction in any form reserved
ISSN: 1569-3759/doi:10.1108/S1569-375920160000098002
21
22 INNA ROMĀNOVA AND MARINA KUDINSKA

for banks. A timely integration of FinTech into business allows banks to

get an advantage in growing competition. This paper provides an exten-
sive analysis of recent trends in FinTech and banking, examining experi-
ence of leading European and US banks, as well as surveys conducted
among members of the financial services industry in different countries.
The authors have studied the development of the financial innovation and
technology market, assessed the existing practices applied in the field of
FinTech, identified the main risks related to development of FinTech and
financial innovations the banks are exposed to on the micro- and macro-
level. The paper provides recommendations for regulators and banks to
ensure reduction of risks associated with development of FinTech.
Analysis of FinTech market has shown growing competition, including
from nonfinancial institutions. The paper provides practical recommenda-
tions to commercial banks for strengthening the position in financial
innovations and controlling the risks associated with introduction of
financial innovations.
Keywords: Banking innovations; FinTech; risks
JEL classifications: G21; M15

INTRODUCTION
In recent years the business landscape in banking has changed dramati-
cally. After the financial crisis of 2007 2008 the financial market authori-
ties have intensified regulation of the banking sector, introducing new or
strengthening existing standards. Besides, innovations and development of
information and financial technologies (FinTech) have increased the neces-
sity to look for more innovative solutions also in banking. FinTech have
become an integral part of banking, and nowadays banks have started to
compete beyond financial services facing increasing competition from non-
bank financial institutions. Besides, start-up service providers, search
engines, and social networks have expanded their services “interfering” in
the fields traditionally covered by banks, for example, providing payment
services (as mobile payments, virtual currencies), alternative financing
opportunities (as peer-to-peer lending, crowdfunding), wealth management,
etc. According to Accenture Report and UK Business Insider, global
Banking and FinTech: A Challenge or Opportunity? 23

FinTech investment has rocketed in recent years reaching ca. 15 billion

USD in 2015 (comparing to 4.05 billion USD in 2013).
Originally the term “FinTech” referred to the “Financial Services
Technology Consortium,” a project initiated by Citigroup to stimulate
technological collaboration. Nowadays “FinTech” is a noun related to
companies that use modern innovative technologies (e.g., software) to
enable provision of financial services. In a broader sense, FinTech is seen
as a new market that integrates finance and technology (Arner, Barberis, &
Buckley, 2015), and replaces traditional financial structures with new tech-
nology-based processes (Hochstein, 2015).
As the FinTech sector borders are difficult to define, available data on
FinTech is somewhat controversial, depending on companies included in
the report. Report of Accenture and CB Insights defines FinTech compa-
nies as companies that “offer technologies for banking and corporate
finance, capital markets, financial data analytics, payments and personal
financial management” (Skan, Lumb, Masood, & Conway, 2014). The
“2015 FinTech Report: Investment Trends in FinTech” by the Silicon
Valley Bank reports on companies that use technology in lending, personal
finance, payments, retail investments, institutional investments, equity
financing, remittances, consumer banking, financial research, and banking
infrastructure. Others believe that both e-commerce and cybersecurity
should also be related to FinTech.
Further development and integration of FinTech will reshape finance,
and experts already call it the FinTech revolution. It is stimulated by
quick development of hardware (including mobile devices), software
(virtual “cloud,” personalization of services online) and growing conver-
gence of information technologies (ITs) and communication technologies
(Dapp, 2014). The perception of the FinTech revolution is rather contradic-
tory. Some members of the financial services industry see the boom in
FinTech as a threat to traditional banking industry. Others believe that
FinTech has become a challenge that can be turned into an opportunity as
it provides more flexibility, better functionality in some areas of banking
business as well as aggregation of services. Thus, the development
of FinTech and its impact on the future of banking are extremely topical
nowadays.
The aim of the paper is to analyze the recent trends in banking, identify-
ing opportunities and risks of FinTech for banks. A timely integration of
FinTech into business can allow banks to get an advantage in growing
competition. This paper is organized as follows: it provides an extensive
analysis of recent trends in FinTech and banking (section “Recent Trends
24 INNA ROMĀNOVA AND MARINA KUDINSKA

in FinTech”), investigates the possibilities for cooperation versus competi-

tion between banks and FinTech companies (section “FinTech and Banks:
Competitors or Partners?”), identifies the main risks related to development
of FinTech and financial innovations the banks are exposed to on the
micro- and macrolevel (section “The Main Risks Related to Development
of FinTech”) as well as provides practical recommendations to commercial
banks for strengthening the position in financial innovations and control-
ling the risks associated with introduction of financial innovations
(conclusions).
The authors have analyzed data of several surveys conducted by
Envestnet® | Yodlee®, Statista as well as surveys conducted for the
EY FinTech Adoption Index (2015). The authors have studied the develop-
ment of the financial innovation and technology market, based on publicly
available statistical information. The following research methods were
used: analysis, synthesis, comparison, generalization and specification,
method of expert evaluations, survey, study and generalization of experi-
ence, as well as a graphical analysis of the statistical information.

RECENT TRENDS IN FINTECH

Over the past 10 years the development of ITs has substantially changed a
number of industries, including tourism (hotel and flight reservation sys-
tems), trade (electronic ordering systems, online shopping), and media
(electronic distribution of content). The financial industry is not an excep-
tion. Moreover, the banks are among the pioneers in adoption of ITs as
most processes in banking are IT-supported (Alt & Puschmann, 2012).
Besides, nowadays banks provide a number of services via electronic chan-
nels (e.g., online banking platforms, electronic stock trading, etc.).
Investment in IT has become an essential part of banking business despite
the size of the bank. Large banks usually concentrate on productivity and
operational excellence, whereas small banks often employ a service-oriented
business strategy focusing on close customer relations. In both cases ITs
play a key role (Tallon, 2010).
Over the past 7 years FinTech companies have substantially expanded
their services “interfering” in the fields traditionally covered by banks.
According to statistical data, after the financial crisis of 2008 the most
popular area of the financial sector that attracted the largest investment
volume to FinTech companies was related to payments, representing
Banking and FinTech: A Challenge or Opportunity? 25

Fig. 1. Distribution of Financial Technology Investment Areas Worldwide,

2008 2013 (%). Source: Statista data.

70% of total financial technology investment (see Fig. 1). Data for 2013
already shows qualitative changes in FinTech with substantially increased
investment in FinTech companies providing banking and corporate
finance services (29% comparing to 10% in 2008), data analysis
(19% comparing to 6% in 2008), and personal finance management
(14% comparing to 5% in 2008).
Statista data show that in 2014 global investment in FinTech has
reached ca. 6.8 billion USD. Besides, according to the Business Insider
UK, total global FinTech investment in the period from January 2010 to
June 2015 has reached 49.7 billion USD. The investment in FinTech is
booming ca. 25% of the investment volume over 5.5 years (over 12 billion
USD) was invested in the first half-year of 2015.
Arner et al. (2015) have worked out a topology of the FinTech industry.
Nowadays FinTech industry comprises five major areas: finance and invest-
ment, operations and risk management, payments and infrastructure, data
security and monetization, and customer interface. Analysis of the value of
investment in FinTech companies worldwide in terms of services shows
that the most investment-attractive services are finance and investment as
well as payments and infrastructure, particularly, peer-to-peer lending/
online lending/scoring, online acquiring and mobile wallets and personal
financial management and planning (see Fig. 2).
26 INNA ROMĀNOVA AND MARINA KUDINSKA

Crowdfunding/
“Mobile first” Crowd
Bitcoin; investing;
banking; Other;
Mobile Point of Sale 4.69% 3.60%
5.99% 1.06%
technologies; P2P/online lending/scoring;
7.23% 26.80%

SME
services;
11.52%

Personal Finance
Management/Private Financial
Online acquiring/m-wallets;
Planning;
25.00%
14.11%

Fig. 2. Investment in Financial Technology Companies Worldwide, 2014 (%).

Source: Authors’ construction based on Statista data.

According to EY FinTech Adoption Index (2015)1 the most popular

FinTech products in 2015 were money transfer (17.6% of active
digitally active users at least once have used such services as nonbank
money transfer, online forex exchange, overseas remittances) and savings/
investment (16.7%: online stockbroking/spreadbetting, online budgeting/
planning, online investments, equity and rewards crowdfunding, peer-to-
peer lending); less popular insurance (7.2% have used car insurance
using telematics, healthcare premium aggregators) and borrowing (5.6%
of respondents have used borrowing via peer-to-peer platforms).
Substantial future potential is seen in attraction of customers with aver-
age annual income of more than 70,000 USD aged 18 54. Besides, the
most active FinTech product/service users are in Hong Kong (29.1% of
all market surveyed have used FinTech products/services at least once),
the United States (16.5%), Singapore (14.7%), Australia (13%), and
Canada (8.2%).
This corresponds to data showing market leaders in terms of FinTech
investment. According to William Garrity Associates Ltd, the world leaders
in FinTech investment are the United States of America (63.6% share in
global FinTech investment), Europe (19.7%), China (8.1%), and India
(4.4%). The biggest player in Europe is United Kingdom with the share in
global FinTech investment of 10.9% or 55.1% of total FinTech investment
in Europe. Consequently, the top 10 world FinTech companies include
China (ZhongAn, Qufenqi), United States (Oscar, Wealthfront, Avant),
Banking and FinTech: A Challenge or Opportunity? 27

United Kingdom (Funding Circle, Atom Bank), Germany (Kreditech),

Sweden (Klarna), and Israel (OurCrowd). Besides, the biggest impact in
2015 had a number of FinTech companies like Transferwise, Lending Club,
R3, Apple Pay, and Funding Circle (KPMG, 2015).
The Global FinTech Influencer Survey by Envestnet® | Yodlee® has
shown that Data&Analytics and Authentication & Security technologies
have made the most essential impact on development of FinTech industry
in 2015. Payments innovators like Paypal, M-Pesa, Samsung Pay, Apple
Pay, Bitcoin, Google Wallet, and others are already well-known in
the market worldwide. Recently popular search engine Google has
introduced a pilot application for “hands-free” payments. Even social
networks have expanded their business providing some financial services.
The most prominent example is Facebook that in the United States
is licensed as a money service business, Facebook Payments Inc. (Banking
technology, 2016). Facebook has created a virtual currency (“Facebook
Credits”), which can be used to purchase items in games and nongaming
applications on the Facebook Platform (see Facebook Game Purchases).
Analysis of numerous surveys have shown that products/services pro-
vided by FinTech companies are getting more and more popular due to
easiness to set up an account, more attractive rates/fees, access to different
products and services, better online experience and functionality, better
quality of service, more innovative products available from traditional
banks as well as greater level of trust than the traditional institutions.
Growing interest can be indirectly shown, analyzing the search engine
Google trends: over the past two years the number of Google searches of
“FinTech” on average has increased more than 10 times, especially in
Singapore, Hong Kong, Switzerland, South Korea, United Kingdom, and
Germany (see Google Trends). On the other hand, among the reasons for
not using FinTech products/services named by users in a number of sur-
veys, the most important is lack of information about the products/services
available. The other reasons mentioned: users don’t have any need to use
FinTech or still prefer traditional financial service providers, don’t know
how to use FinTech products/services, or don’t trust them. Another impor-
tant aspect is related to e-security.
Thus, recent trends have shown that FinTech industry is developing
very quickly, building potential (in some business fields already existing)
competition to traditional commercial banks. Therefore, it is important to
investigate whether FinTech is a potential threat or opportunity for tradi-
tional banks.
28 INNA ROMĀNOVA AND MARINA KUDINSKA

FINTECH AND BANKS: COMPETITORS

OR PARTNERS?
Based on the analysis of products/services provided by FinTech companies,
the authors conclude that FinTech companies can be classified in two
groups:

FinTech companies providing services complimentary to bank services

(e.g., providing technologies used by banks to provide financial
services);
FinTech companies providing services traditionally covered by banks
(e.g., payments).

This classification forms bases for further analysis of bank potential

reaction/action concerning development of FinTech that can be seen as
both competitor and partner.
Development of FinTech has growing impact on banking business as
many banking products are information-based and therefore can be pur-
chased from different financial service providers. Besides, modern data ana-
lysis methods and ITs allow individualizing many financial services
digitally (Dapp, 2014), making these services more customer-oriented. The
financial experts believe that for traditional financial services companies
(including banks, insurers and wealth and asset management companies)
the risk of disruption is real. Therefore, it is extremely important for banks
to stay updated and form cooperation with FinTech in form of partnership
or in-door solutions.
Technology-driven providers are getting more and more active in pro-
viding simple web- and data-based financial products/services creating
competition to traditional banks. Increased potential threat to the banking
industry is in the field of less knowledge-intensive products/services that are
easily standardizable. According to Statista, the financial experts in Europe
see possible threats from new potential market participants (FinTech com-
panies) in such fields as payments (95% of respondents see it as a very
likely and likely scenario), simple savings products (78% of respondents),
current account (64% of respondents), and consumer credit (54% of
respondents). Less-potential threat is expected in structured savings pro-
ducts and home loan business (see Fig. 3).
Many European banks have already recognized the importance and
potential of the IT use in banking business. According to estimates of
Deloitte, in 2014 banks in Europe have spent more than 55 billion euro
Banking and FinTech: A Challenge or Opportunity? 29

100
90 Very likely and likely Unlikely and very unlikely
80
70
60
50
40
30
20
10
0
Payments Simple savings Current Consumer Structured Home loan
products account credit savings business
products

Fig. 3. Likelihood of New Financial Market Participants Posing Threat to

Existing Retail Banks in Europe, 2014. Source: Authors’ construction based on
Statista data.

Fig. 4. The Share of Software Costs to Assets in the Five Largest Banks in
Europe, 2008 and 2015. Source: Authors’ construction based on data of bank
annual reports.

on IT, however only a small share of it (9 billion euro) was spent on new
systems (Deloitte, 2015). At the same time, if we compare the amount of
financial resources that five biggest European commercial banks have
allocated for the purchase and development of new software (see Fig. 4),
the upward trend is obvious: nowadays banks invest much more money
to modernize the systems than a few years ago, increasing software costs
several times.
On the other hand, according to the Statista survey data (February
2015), the reaction of banks worldwide to development of FinTech compa-
nies is different. The data show that banks don’t avoid cooperation with
FinTech companies, starting up programs to incubate FinTech companies
(43% of banks participating in the survey), setting up a venture fund to
30 INNA ROMĀNOVA AND MARINA KUDINSKA

finance FinTech companies (20%), partnering to cooperate with FinTech

companies (20%). Minority of banks have recently acquired FinTech com-
panies (10%) or launched own FinTech subsidiaries (7%).
Closer cooperation with FinTech providers would allow banks to
use comparative advantages of FinTech companies. Based on analysis
of FinTech development and peculiarities of these business fields, the
authors have identified important comparative advantages of FinTech
providers:
highly standardized and low-cost financial services;
internet-based and therefore less geographically concentrated;
changing consumer behavior;
lower regulation of financial services;
relatively lower risk of financial services/products (e.g., borrower default
risk, maturity risk), etc.
High level of standardization of simple data-based financial products/
services allows providing these services to customers at lower costs
increasing potential target market. Besides, as FinTech companies are
internet-based, FinTech providers are less geographically concentrated
and potential customers are diversified. Thus, target market is not limited
to one country or region, but standardized services/products without
additional costs (or with low costs) can be provided worldwide. Changing
consumer behavior towards technology-based solutions (internet-based
consumption, communication, development of social networks, social
media, mobile applications, etc.) has increased interest for FinTech ser-
vices/products consequently creating the market for FinTech. Besides,
products/services provided by traditional banks must comply with regula-
tory standards that are linked to costs and expertise. At the same time,
one of the major factors that allow FinTech companies to enter the mar-
ket is substantially lower regulation of financial services provided by non-
banks (Dapp, 2014). In some fields traditionally covered by banks (e.g., in
lending) FinTech companies have an important comparative advantage:
as they match borrowers and savers directly thus avoiding maturity
risks, and the borrower default risk is also carried fully by the lender
(The Economist, 2015), as the FinTech companies provide just the lending
platform.
Mutually beneficial cooperation between traditional banks and FinTech
companies would allow banks to ensure higher standardization of simple
data-based financial products/services, thus reducing costs of such products/
services (e.g., payments, simple savings products). Besides, modern data
Banking and FinTech: A Challenge or Opportunity? 31

analysis methods and ITs can allow banks to improve risk assessment
approaches (data-driven lending). Moreover, more intensive use of
FinTech would enable banks to increase quality of nonstandardizable
knowledge-intensive products.
Analyzing practices applied by banks in Europe, a number of successful
cooperation examples can be identified: Santander Bank (UK) partnership
with the peer-to-peer lending platform Funding Circle (for rejected bank
business loan applicants); Goldman Sachs (USA) has made significant
investments into payments and alternative finance companies like Square,
Bluefin Payments, Bill Trust, Revolution Money; Citigroup (USA) has
launched a Citi FinTech unit that is responsible for the development of its
mobile banking services etc. (see Tech in Asia, 2015; American Banker,
2015). Banks are getting more and more active in involving into coopera-
tion with FinTech. In terms of necessary investment, partnership with
FinTech companies is the least-expensive option with relatively lower risk
(comparing to acquiring of FinTech companies or establishment of its own
FinTech Company).
The experts believe that in the long run digitalization should be given a
high priority by traditional banks. It will allow creating opportunity out of
challenge to ensure future development of banks. Thus, it can be concluded
that FinTech companies and traditional banks at the same time can be
competitors and partners, but cooperation is essential for banks and can be
mutually beneficial.

THE MAIN RISKS RELATED TO DEVELOPMENT

OF FINTECH
Traditional banks have long-term experience in provision of financial
services and therefore have accumulated necessary expertise especially in
such fields as provision of complex financial products, mortgages and cor-
porate lending, risk management, financial intermediation, wealth man-
agement, and other services that ask for highly qualified bank managers.
Thus banks have an important comparative advantage in the field of
knowledge-intensive products and services. For many years banks apply
the “know your customer” approach that allows provision of persona-
lized, customer-oriented financial services to ensure customer satisfaction.
At the same time, high regulatory standards have ensured establishment
of banking business that is based on security and data protection that is
32 INNA ROMĀNOVA AND MARINA KUDINSKA

an important precondition for the use of financial (or any other)

technologies.
According to Alt and Puschmann the banking industry will continue
transformation in the forthcoming years due to four drivers: consequences
of the financial crises, changing behavior of banking customers, pace of dif-
fusing innovative downstream IT solutions, and the emergence of non-
banks (Alt & Puschmann, 2012). The latter are related to development of
FinTech. From the point of view of traditional banks, development of
FinTech bears additional risks:

partial loss of the market share due to new competitors (especially in

payments, credit cards, simple savings)
additional pressure on margins, consequently lower revenues
increased operational risk and risk of fraud
growing bank dependence on financial services technology solutions.

Additional challenges are expected on the regulatory side. Since 2007 in

the EU three payment directives were introduced. The latest, the revised
Directive on Payment Services (PSD) came into force in January 2016, pro-
viding legal foundation for the creation of an EU-wide single market for
payments (see Directive on Payment Services). One of the main objectives
of this Directive is to “improve the level playing field for payment service
providers” and encourage lower prices for payments, thus changing the
banking landscape.
These risks, related to development of FinTech, require special attention
of financial market regulators. Particular bank regulatory standards should
be also related to nonbank providers of financial services. For example, all
market participants must follow the principle “know your customer,” pre-
venting illegal use of funds and fulfill requirements on 24/7 online transac-
tion monitoring and regular analysis of data. Besides, it is vitally important
to have sufficient capital and the level of responsibility ensuring the safety
and security of customer information.
Emergence of new market players offering innovative high-quality,
cheaper, and more convenient financial services will inevitably lead to an
increase in competition for traditional banks and consequent loss of custo-
mers. Increased competition, in turn, leads to a decrease in revenues from
the financial services of banks. The authors recommend the banks to
increase financing for new technologies becoming more sophisticated and
innovative market participants. The potential of FinTech should not be
ignored or underestimated.
Banking and FinTech: A Challenge or Opportunity? 33

CONCLUSIONS
In modern economies financial services industry has become one of the key
contributors to country’s domestic product. FinTech have become an inte-
gral part of banking, and nowadays banks have started to compete beyond
financial services facing increasing competition from nonfinancial institu-
tions. Consequently, traditional banks have started to lose part of their
market share. Development of FinTech has a substantial impact on banks
as many banking products are information-based and therefore can be pur-
chased from different financial service providers. On the other hand, mod-
ern data analysis methods and ITs allow individualization of many
financial services digitally. Increased potential threat to the banking indus-
try can be identified in the field of easily standardizable, less knowledge-
intensive products/services (payments, simple savings product, current
account, and consumer credit). But timely cooperation with FinTech com-
panies can help banks to create new opportunities. The surveys show that
the reaction of banks to development of FinTech companies worldwide is
different: banks start up programs to incubate FinTech companies, set up
venture funds to finance FinTech companies, establish cooperation as part-
ners; some banks have acquired FinTech companies or launched own
FinTech subsidiaries.
FinTech companies can be classified in two groups: companies providing
services complimentary to bank services (potential partnership with banks
can be expected) and companies providing services traditionally covered by
banks (FinTech as competitors, cooperation is possible). Closer coopera-
tion with FinTech providers would allow banks to use comparative advan-
tages of FinTech companies as highly standardized and low-cost financial
services, relatively lower risk of financial services/products (e.g., borrower
default risk, maturity risk), technology-oriented consumer behavior, etc.
Although the development of FinTech “create” additional risks for the
banking industry: partial loss of the market share due to new competitors,
additional pressure on margins, consequently lower revenues, increased
operational risk and risk of fraud as well as growing bank dependence on
financial services technology solutions. Therefore, nonbank financial service
providers require special attention of financial market regulators in terms
of applied standards in dealing with customer information, monitoring,
sufficient capital, etc.
Thus, on one hand, development of FinTech is an additional challenge
for banks; on the other hand, this challenge can be turned into an opportu-
nity that will support further growth of banks. Therefore, it is important
34 INNA ROMĀNOVA AND MARINA KUDINSKA

for banks to commence cooperation with FinTech companies especially in

the business fields where FinTech companies provide services complimen-
tary to bank services. Recent developments require banks to increase
investment in FinTech, rethink service distribution channels, increase
further standardization of back-office functions and services, etc. A timely
integration of FinTech into business can allow banks to get comparative
advantages in growing competition.

NOTE

1. EY FinTech Adoption Index is based on survey conducted in Australia,

Canada, Hong Kong, Singapore, the United Kingdom, and the United States
(10,000 digitally active participants).

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