Britain's banks may be overestimating their ability to limit the impact of fintech and open banking on future profit margins says the Bank of England.
The Bank of England's 2017 stress test shows the UK banking system is resilient to deep simultaneous recessions in the UK and global economies, large falls in asset prices and a separate stress of misconduct costs.
That's the headline result. But buried beneath the wealth of data is an under-reported exploratory scenario which for the first time examined major UK banks’ long‑term strategic responses to an extended low growth, low interest rate environment with increasing competitive pressures spurred by the use of digital technology.
Rather than informing regulators about the immediate capital adequacy of participants, the exercise was designed to encourage banks to think about their strategic challenges. These could include a material downgrade on the £3.4 billion in fees earned by banks from overdraft charges and payments, as consumers use smart budgeting tools and alternative providers to better manage their finances.
While the analysis assumes the competitive pressures from fintech could lead to a reduction of £1.1 billion in banks’ aggregate profits by end‑2023, the Bank of England believes that may be an underestimate, identifying three important risks to the bank's projections.
"First, competitive pressures enabled by fintech, and in particular the emergence of Open Banking, may cause greater and faster disruption to banks’ business models than banks project.
"Second, banks are projecting large reductions in costs and there is a risk that they will be unable to execute these plans fully while delivering a broad range of services, particularly given that the cost of maintaining and acquiring customers may be higher in the scenario.
"Third, in an environment of low growth and low interest rates the equity risk premium may be higher than banks expect."
At a press conference announcing the results of the tests, BofE governor Mark Carney speculated that in the future financial apps, rather than banks, could become the first point of contact for consumer financial services, leaving banks as mere back-end utility providers.