Digital banking start-ups, the shiny new thing to keep sluggish and problem-laden incumbents on their toes, have yet to make a big noise in European finance. They're too small to threaten existing players' huge balance sheets, risk-averse customers and high regulatory barriers to entry.
A much more potent competitor is created when these start-ups team up with big brands in the world of telecoms and media. The threat sharpens as big tech wades ever further in.
The latest move in upstart finance will soon arrive in Germany, where a new mobile banking service from phone carrier Telefonica will offer checking accounts, a free MasterCard and small instant loans. Telefonica's partnering with digital bank Fidor, effectively using its license as a springboard for financial services.
It's a deal that makes sense on both sides. Telefonica wants to assure customer loyalty while maybe gaining a bit of revenue. Fidor needs scale: its customer base of around 100,000 in Germany is hardly the stuff of nightmares for, say, Commerzbank and its 16 million individual customers. But Telefonica's 43 million customers is a different ballgame.
The combination also skips some hurdles. It would take time and money for Fidor to keep growing its user base alone -- the bank's gimmicks such as offering more lucrative interest rates based on the amount of Facebook 'likes' it gets won't get it very far. And for Telefonica, the deal bypasses the strain of going it alone or partnering with an incumbent that might be less user-friendly or mobile-focused.
That's not to say it's a recipe for success -- telecoms' past forays into finance have been mixed. Vodafone's early experiments with mobile payments in Africa were a big success. U.S. carrier T-Mobile started offering pre-paid debit cards and money transfers to customers in 2014, and ended the service this month because it faced too many competitors. Big global banking groups don't need to start quaking in their boots, yet.
The biggest risk comes when technology heavyweights like Google, Apple or Amazon really start to zero in on their business. These tech giants are relentlessly innovative, and their reach -- Facebook alone boasts 1.65 billion monthly users -- and grip on customers' personal data is virtually unparalleled.
Bankers see big tech as their chief competitive threat, according to a survey by Capgemini/Temenos published in Nov. 2015. Only a quarter surveyed thought their biggest future rival was already in business.
For now, the tech giants have barely scratched the surface. Apple and Google have mobile payment tools, Facebook users can send money to friends through Messenger and Amazon is pitching student loans in partnership with Wells Fargo, but they're not exactly setting the financial world on fire. Their Asian cousins are more advanced: WeChat and Tencent can now be used to pay for everything from rent to a taxi, and Alibaba runs mutual funds.
They're set to be the main competitors for the payments business in Europe, according to 96 percent of respondents to a Finextra/FIS survey of finance companies last year. There's scope for them to make big inroads, after the European Commission introduced new rules opening up the market -- and that's bad news for banks, which earn about a quarter of their retail revenues from the 128 billion-euro ($140.5 billion) business, according to Deloitte.
This doesn't have to be just a nightmare for incumbents. It could be an opportunity. European banks could lift pre-tax profits by 40 percent in five years if they find the right way to limit the impact of disintermediation and capitalize on new tech, according to BCG Partners.
But that will take time, money and strategic focus -- that's all going to be in short supply, with European lenders under pressure to raise capital, deal with bad loans, and comply with new regulations. Deutsche Bank, for example, recently abandoned plans for a new digital bank in the U.S. to focus on fighting fires at existing businesses.
With more ventures like Telefonica's on the way, expect the pressure to rise.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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