1.1 The Digital Economy and Financial Services
The development of the digital economy is affecting all industries and business sectors and producing changes at an unprecedented speed and intensity (Arner et al. 2016). A new way of living, thinking and acting is emerging which is also impacting on people’s economic lives: their spending habits and professional activities. Digitalisation simplifies life and changes our approach to services (OECD 2017). Its impact on the financial industry, and banking services in particular, is especially significant (Arner et al. 2016; Zetzsche et al. 2017) where new entrants are present: the so-called FinTech companies. These firms employ technological and digital solutions to provide financial services and are developing multiple innovative strategic approaches and business models that meet customers’ interest and preferences.
As a consequence, the perimeter of the financial system is widening to include a new industry sector—FinTech. The financial market landscape has changed substantially, and technological innovation has eroded the boundaries between financial products and services and the subjects either authorised to provide them or actually providing them (EBA 2017). An additional result of this is that new competitive forces and dynamics are developing with consequences for the market share of incumbent financial intermediaries. The FinTech revolution is affecting banks in particular, which are having to rethink their business in the face of competition.
The main purpose of this work is to analyse the strategic choices adopted by the different types of operators (FinTech, BigTech and incumbent firms) in delivering banking services and examine the way digitalisation is affecting the business models employed by banks and other banking services providers. To this end, and to provide recent evidence on actual market development, we primarily consider Europe and compare it to other relevant international experiences (such as the USA and China), including as regards non-European companies entering the European market through a variety of organisational approaches and business models.
This analysis allows the opportunities and risks related to the various business models to be highlighted, in line with the Financial Stability Board (FSB 2017) and European Banking Authority (EBA 2018) suggestions. In addition, the work highlights the changes to the financial system structure currently underway globally. To this end, we employ a proprietary database that aggregates information on a large international sample, derived from various sources.
1.2 The Structure of the Book
The book is structured to highlight the distinctive features of FinTech, BigTech and incumbent operators and present an up-to-date view of the regulatory framework, above all at the European level. Chapter 2 clarifies the differences between the various types of new financial operators (FinTech, TechFin and BigTech), having excluded Tech companies operating as providers of technological solutions for financial intermediaries. Once again in Chap. 2 we analyse the financial activities developed by FinTech and TechFin companies, stressing the peculiarities of their business model as compared to incumbent banks. In this part of the study, the discussion begins with an analysis of a representative FinTech sample operating in the European market.
This analysis is further developed in Chap. 3, taking into consideration a representative sample of BigTech companies (four US and two Chinese) which have employed a wide range of approaches to develop their financial market presence. In so doing, we have highlighted the differences between FinTech companies and their potential competitive strengths as compared to incumbent firms. Subsequently, we analyse the strategies adopted to date by the banks, both large and small and with different operational characteristics, to examine how they are grasping the opportunities offered by technological development and the digitalisation of business (Chap. 4). More specifically, in this part of the research we consider three main categories of banks, to highlight the specific characteristics of the strategic approaches adopted by
- (a)the main international banks which are reacting proactively to the diverse demands emerging from their customers, including in response to competitive pressure from FinTech and BigTech companies. The case studies analysed (32 international banks particularly active in digitalisation terms) show that some international banks are actually leading or contributing significantly to innovation in some specific areas and provide evidence on the similarities and differences between European and other international non-European banks;
- (b)small banks, underlining the possible strategic choices that can be adopted and citing the experience of small banks in some markets;
- (c)the digital native banks, finally, to discuss how they differ from incumbents. In this case, too, our analysis is based on a proprietary dataset that integrates several sources and includes 22 digital banks. We have examined independent banks and those acting as part of banking groups or BigTech conglomerates, to highlight the differences in the strategic approaches adopted.
Overall, our evidence underlines the presence of multiple strategic approaches, as well as the distinctive features, strengths and weaknesses of each type of financial operator (both native digital institutions and incumbent firms).
Chapter 5 addresses some regulatory issues with reference to the scope of regulation and the boundaries of the FinTech activities. The initial regulatory “wait-and-see” approach was determined internationally by the belief that hasty regulatory intervention risked undermining the benefits of innovation. Lately, regulators have started to take more coordinated action, for the purposes of limiting the risks and closing the regulatory arbitrage gap. Uncontrolled activities by unregulated companies in financial markets constitute a significant threat in customer and investor protection, financial stability and financial market resilience terms. This chapter emphasises recent European regulatory initiatives.
Finally, Chap. 6 concludes with considerations on the future development of the banking and financial system and provides food for thought for policy takers and policy makers. The study’s results contribute to the next-generation banking business model debate that has recently been the subject of the Bank for International Settlements-Basel Committee on Banking Supervision (hereafter BIS-BCBS) (2018) theoretical analysis.
In detail, our analysis shows that several business models co-exist in the banking industry. While FinTech and BigTech firms offer new and highly digitalised financial services, meeting consumers’ demand and preferences, incumbent firms are reacting to various extents. Large banks are digitalising with varying degrees of commitment and innovation. Strategies vary, but mainly relate to shareholding, in-house development and partnership with FinTech and BigTech firms. The number of initiatives notwithstanding, most focuses on channel digitalisation, while only a few are pursuing true “digital disruption”. On the other hand, smaller banks are apparently struggling to enact significant strategy and business model changes consistent with technological development. The survival of these smaller financial institutions may lie in partnerships with FinTech firms. Finally, the new business models proposed by native digital banks are also affecting the way banking and financial services are offered, contributing to changes in customer expectations.
Overall, the book shows that sluggish development and the difficulties encountered by banks play a role in the development of the new digital operators who often also benefit from a lighter regulatory framework than incumbent firms. A further relevant issue is the data processing and regulatory framework of new digital operators, which poses interesting client protection questions, to which the international legislation response is still fragmented and non-homogeneous.
References
- Arner, D. W., Barberis, J., & Buckley, R. P. (2016). The evolution of FinTech: New post-crisis paradigm. Georgetown Journal of International Law, 47(4), 1271–1320.
- BIS-BCBS. (2018, February). Sound practices. Implications of fintech developments for banks and bank supervisors. Basel Committee on Banking Supervision—BIS. Retrieved March 27, 2019, from https://www.bis.org/bcbs/publ/d431.pdf.
- EBA. (2017, August 4). Discussion paper on the EBA’s approach to financial technology (FinTech). EBA/DP/2017/02.
- EBA. (2018, July 3). EBA report on the impact of Fintech on incumbent credit institutions’ business models.
- FSB. (2017, June 27). Fin...