How Much of a Threat Are Tech Titans to Global Banks?

S&P Global Ratings does not see competition from large technology groups or “tech titans” as posing a short-term risk to its ratings on global banks, said a report titled “The Future of Banking: How Much Of A Threat Are Tech Titans To Global Banks?” recently published. While the barriers to entry in the banking industry […]

S&P Global Ratings does not see competition from large technology groups or “tech titans” as posing a short-term risk to its ratings on global banks, said a report titled “The Future of Banking: How Much Of A Threat Are Tech Titans To Global Banks?” recently published.

While the barriers to entry in the banking industry are high, tech titans like Facebook or Apple possess a competitive edge over new entrants and upstart financial technology companies.

“In our view, banks will feel limited short-term pressure on their transaction fee income as they look set to benefit from the good medium-term growth fundamentals of card-based payments. This is despite bank revenues coming under possible threat from the recent growth of e-wallets and alternative payment methods,” said S&P Global Ratings’ credit analyst, Paul Reille.

We expect that tech titans’ lending activities will remain targeted to merchants operating on their platforms and to segments currently underserved by banks due to profitability and capital reasons. Similarly, we believe that regulation will limit tech titans’ ability to compete meaningfully with banks over customer deposits. In the long term, regulation is likely to remain a key factor deterring tech titans’ efforts to increasingly offer the full financial services suite currently provided by banks. That said, banks could feel the biggest competitive threat from tech titans for activities where barriers to entry are low–such as transaction revenues, which could constrain their margins.

“In the short term, we don’t expect competition from tech titans to have an immediate impact on the banks that we rate. However, in the long term, we think that they are well-placed to potentially disrupt certain aspects of the traditional banking industry value chain,” said Mr. Reille.

In our view, payments is the main area where tech titans could potentially disrupt global banks. Although these firms are not posing any meaningful short-term pressure on fee income, we believe that they could leverage their strong customer bases and networks to potentially constrain traditional banks’ payment services revenues in the longer term. We do not consider tech groups to pose any short-term threat to banks’ lending or depository activities in the US or EMEA. In the short term, we don’t expect competition from tech titans to have an immediate impact on the banks that we rate, but see them as well-placed to disrupt banking in certain areas in the longer term.

(Source: S&P Global)

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