New entrants and increased competition brought about by challenger banks could result in revenue losses of up to 30 percent among legacy banks over the next 10 years. While digitalization can lower costs for incumbent banks by 30 to 50 percent, new competition and greater transparency in the banking market, prompted by the emergence of challenger banks driven by fintech startups, are likely to lower revenues by 10 to 30 percent in the next decade, according to the report “Bank X: The New New Banks” published by Citi on Thursday.
As legacy banks recognize the threat that new entrants into banking are posing to revenue and customers, they need to reinvent themselves and reimagine banking. This involves legacy banks partnering with technology companies to create effective joint ventures as well as moving into more disruptive technology and business models to transform themselves into digital competitors, the report said.
If banks successfully transform digitally, their ROEs will rise from 8 percent in Europe and 16 percent in the U.S. to 15 percent and 24 percent respectively in a bullish scenario, and 5 percent and 10 percent respectively in a bearish scenario, the report noted.
Bank X
Built by new entrants, challenger banks designed around new digital technologies, leveraging data insights via agile technology stacks to offer customers better personalization and fully digital banking experiences. As they offer their services remotely via online or mobile banking, challenger banks tend to be quicker at incorporating new products or processes into their platforms and help easily connect with third-party products, ultimately offering more choices to the end-user.
By creating their own Bank X, we believe legacy banks can transform themselves from slow-moving caterpillars to agile butterflies, Ronit Ghose, Citi Global Head of Bank Research, said.
The report noted that while creating a new digital-only bank can help incumbent banks meet an evolving set of customer expectations quickly and effectively, setting up an independent challenger bank needs to be differentiated from digital transformations and core banking overhauls that they undertake. This is because creating their own Bank X requires independent application programming interfaces (APIs) and technology stacks, which is a significant departure from the operating model of incumbent banks.
Need for Regulation in Asia
Apart from the lower number of challenger banks in Asia compared to the U.K. and U.S., Citi noted that challenger banks in Asia are largely offshoots of big tech, telcoms, and banks. For example, WeBank, MYbank, and Kakao Bank are all backed by tech firms, KBank and Jibun Bank are backed by telcoms, while DBS has made progress in Indonesia and India with digibank, its own challenger bank.
While Asia has several challenger banks originating from startups aiming to disrupt the financial system, Neat in Hong Kong or Paytm in India, they are exceptions. This is a result of the limited regulatory framework for challengers in Asia, with the emerging exception of Hong Kong, and the presence of large tech companies, particularly in China.
Conversely, challenger bank activity is vibrant in the U.K. and Europe as a result of progressive regulations enacted to promote competition and break up the banking monopoly, the report said.