Are fintech upstarts a threat to banks?

Are fintech upstarts a threat to banks?

Looking at it from a contrarian's perspective, banks make screaming buy propositions because of their attractive valuations right now.

Whether you are looking at Chinese banks, European lenders or United States financial institutions, you will find that many share one similar trait - they all trade at a fraction of their break-up value.

To offer a few examples: Household names such as HSBC and Citigroup are trading at around 0.6 to 0.7 times price-to-book value, while German lender Deutsche Bank languishes at a mere 0.33 times price-to-book.

Chinese lenders don't fare any better either, with the Industrial and Commercial Bank of China, Bank of China and China Construction Bank trading at between 0.6 and 0.75 price-to-book.

Against this backdrop, the performance of the three listed Singapore lenders - DBS Group Holdings, OCBC Bank and United Overseas Bank - appears more credible as they trade at around their price-to-book value.

But even though they are priced at a premium to their global rivals, this is still well below the price-to-book they used to trade at historically.

What does this gloomy scenario suggest?

The abnormally low valuations seem to imply that investors are anticipating banks to be hit with huge losses in their loan books.

However, judging from the latest results, this is one nightmare that is unlikely to arise, even if the worst-case scenario of their non-performing loans were to materialise.

Of course, other concerns abound. Brexit dealt banks a savage blow with a brutal sell-off last Friday while there is a squeeze on profitability as interest rates fall in some cases to negative levels.

But there is one clear and present danger unsettling investors which gets a daily airing.

This is the oncoming disruption from rapid advances in financial technology, which is allowing new players to make big inroads into turf occupied exclusively by banks.

As matters stand, most consumer banking is as yet untouched by fintechs - as players in financial technology are known - and we are stuck with banks that look practically all the same to us, offering very much the same products at very much the same price, whether in fixed deposits, loans or credit cards.

And it is this lack of alternatives that allow banks to continue to enjoy an unrivalled position in our economy and make a tidy profit out of it.

But open a newspaper's financial pages on any day, and you will be bombarded with terms such as peer-to-peer lending, robot financial advisers and crowdfunding, terms we would not have encountered even a few years ago.

In China, the top fintech players such as Alipay or Tencent now have as many, if not more, clients than the top banks - and they are financially powerful enough to pose an even bigger challenge, given the edge they already enjoy in the e-commerce space.

Those of us who have watched over the years how Internet trading has stolen the lunch of remisiers by luring away hordes of their clients realise that fintech, while still in its infancy, is no ordinary threat.

Just as Internet trading has changed the face of stockbroking forever and pared income of remisiers to the bone as broking commissions plummet, well-paid bankers may be facing their so-called Uber moment as the Internet threatens to rip out their middleman role from basic banking to lending and financial services.

This is why fintechs pose a big danger.

If they offer better value, it won't take long for customers to notice and switch to them.

For instance, they can try to steal the bank's bread-and-butter lending business by finding better ways to identify creditworthy borrowers and offer them a lower loan rate.

Fintechs can also threaten the lucrative array of fees banks earn in their wealth management transactions by offering "robo-advisers" which charge a tiny fraction of the fee for doing very much the same job as a human investment professional.

Not surprisingly, banks are reported to be fighting back by either trying to create their own platforms, or partnering with some of the new challengers - but the question is whether they will be able to pick the winners.

As the experience of the dot.com era at the turn of the century showed, there were media companies willing to splash out serious money for dot.com start-ups but their chances of picking the winners were very slim.

Just as a few dot.coms in the late 1990s really hit big-time eventually, only a couple of fintechs will make it big.

So as banks scramble to meet the challenge with their wagers on fintechs, the question is whether they will be investing in future hits or those that fall by the wayside.

Of course, it would be a bit of an exaggeration to say that the threat posed by fintechs is responsible for the low valuations of bank stocks.

But it adds to the unattractiveness of an unloved sector that has been hit by a host of public relations disasters in recent years like the mis-selling of financial products and triggering a global financial catastrophe whose fallout still affects us eight years after it ended.

Buying bank stocks might once have been an interesting way to make a wager on how an economy is performing.

But the onset of fintechs that transform the way we do our financial transactions may arrive far quicker than what most of us envisage.

That makes for a compelling concern for investors debating whether to buy bank stocks at current depressed valuations.

engyeow@sph.com.sg


This article was first published on June 27, 2016.
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