10 Banks vs Bigtech/Fintech vs Bigtech Flashcards
main functions of a bank and nonbank
1) accepting deposits - banks only
2) granting loans - banks & nonbanks
3) providing payments - banks & nonbanks
4) maturity transformation - banks only
Payment
a combination of the
exchange of information and money
what a phrase “A bank as a family doctor” means?
trust
maturity transformation
Banks borrow short and lend long, i.e. from short-term depos they provide long-term loans and investments (=positive maturity transformation, unlike insurers that provide negative maturity transformation).
Bank´s balance sheet & maturity transformation
- from deposits to securities
- from deposits to loans
conventional investment management
- bank deposits
- mutual funds
- pension funds
- insurance funds
non-conventional (alternative) investment management
- sovereign wealth funds
- private equity
- exchange traded funds
- hedge funds
Three times ‘New Normal’ in recent banking
1) Qualitative New Normal
2) Regulatory New Normal
3) Quantitative New Normal
Qualitative New Normal (new client´s expectations)
1) Digitalization
✓ New Normal – everything is online and for free
✓ Interaction with clients/importance of feedback
✓ Internet, on-line apps (future of branches)
2) Commoditization
✓ a client considers bank products as commodities and evaluates it based on its price rather than on its quality – importance of price comparators
3) Globalization/fierce competition
✓ Depos: investment platforms, mutual funds
✓ Loans: P2P lending: Zopa, JD Finance
✓ Payments: Google, PayPal, Samsung
Regulatory New Normal (higher requirements) (higher penalties, tighter regulatory capital and liquidity requirements)
Higher regulatory burden on banks (capital requirements,
new liquidity ratios etc.) – 200 changes per day!
USD 345 billion in penalties (fines) paid by TOP 20 global
banks as of 12/2018 and still counting
Quantitative New Normal (lower banks´ profitability)
- Deteriorating financial performance of global banks
- Non-sustainable business model of ‘casino’ banking
Main risks in EU banks in terms of regulation
(measured by risk-weighted assets „RWAs“)
- credit risk
- operational risk
- market risk
- CVA and other
Non-performing exposures
Non-performing exposures “NPEs“ in the EU (90 days past due) – basic measure of credit risk.
NPEs by size class were decreasing in the
2014-2019 period, but NPEs will increase significantly after the COVID-19 crisis.
- Higher NPEs → higher loan loss provisions → lower bank profit → lower Return on Average Equity (ROAE)
- Huge loan loss provisions → bank loss → lower capital → recapitalization (bail-out) needed
Recapitalization
- in theory as 1 out of 4 banks’ rescue tools
- in practice: nationalization of banks after the fall of Lehman Brothers (15.9.2008) – privatization of profits and socialization of losses
Fintech
o small financial-services business that use technologically innovative apps, processes or business models
o Examples: Square, Klarma, Lending Club
o Examples of Czech Fintech companies: Zonky, Twisto, Red Eggs, Budgetbakers
Bigtech
o big Fintech companies
o Examples of US Bigtech: Google, Apple, Facebook, Amazon, Microsoft, Paypal
o Examples of Chinese Bigtech: Baidu, Alibaba, Tencent, JD.com, Xiaomi
what challenges traditional banks?
Fintech and Bigtech enter the banking cloud model
banks vs disruptors
Fintech/Bigtech as emerging disruptors are facing different/simpler processes than banks
- banks: 1 optimization and simplification, 2 agility 3 innovation
- disruptors: 1 innovation, 2 agility 3 optimization and simplification
apple (bigtech) functions
- deposits
- loans
- payments
google (bigtech) functions
- deposits
- loans
- payments
facebook (bigtech) functions
payments
alibaba (bigtech) functions
- deposits
- loans
- payments
- maturity transformation
what is the potential of Bigtech?
Huge potential of Bigtech: their customer bases are much bigger than those of banks
Facebook´s Libra
- Libra is a permissioned blockchain digital currency backed
by a basket of fiat currencies (the permissioned blockchain) - Huge potential: more than 2 billion users (electronic Libra
wallet also for the unbankable population) - For its success, it needs to be accepted by merchants and
in shops and online stores as legal tender - Threat for banks: lower payments and deposits, lost of
primary bank accounts of clients (if wages are in Libra) - The risk of low rates of merchant and consumer adoption
with the threat of regulatory action -> challenges
1) FX risk: currency wallet vs WeChat/WePay (renminbi)
2) Regulation: Anti-Money Laundering (AML) & Know Your
Customer (KYC) Compliance
Three scenarios of bank future
1) Adaption and transformation of banks
✓ Regulated banks as low-margin utilities (rather than high-margin ‘casinos’/investment banks)
✓ Bank-Fintech partnerships
2) Uberization of banking
✓ Banks loose their contact with clients
✓ Banks at the end of global financial services chain (Application Program Interface/API)
3) Bankless future/Blockchain
✓ The use of distributive ledger technology for bank services
Three scenarios of bank future
1) Adaption and transformation of banks
✓ Regulated banks as low-margin utilities (rather than high-margin ‘casinos’/investment banks)
✓ Bank-Fintech partnerships
2) Uberization of banking
✓ Banks loose their contact with clients
✓ Banks at the end of global financial services chain (Application Program Interface/API)
3) Bankless future/Blockchain
✓ The use of distributive ledger technology for bank services
Scenario 1: Transformation of banks
o Banks need to transform themselves in order to survive and keep pace with Fintechs
a) branch optimization
b) technology implementation
c) atraction and retention of talented staff
Scenario 3: Blockchain
- Blockchain = software that enables data sharing across a network of individual computers. A blockchain describes computers transferring blocks of records in a chronological chain.
- Blockchain technology is also known as distributed ledger. The term “distributed ledger” refers to the concept that each user shares the same “ledger” or set of accounts as defined by the software.
- It works through shared software infrastructure and trust. Users agree to a software protocol describing the rules for the type, quality, and transferability of data in addition to the rules for authorisation, verification and permutation.
- Users trust that information entered into and transactions conducted over the blockchain software are valid.
How a blockchain works
- A wants to send money to B
- the transaction is represented online as a “block”
- the block is broadcast to every party in the network
- those in the network approve the transaction is valid
- the block then can be added to the chain, which provides an indelible and trnsparent record of transactions
- the money moves from A to B
