Juan (Fred) Kelly

FinTech and BankingFriend or Foe?

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DISCLAIMER

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1. BANKING AND FINTECH

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• Have banks been hit below the waterline?

• Should banks be exiting certain businesses?

• Where is FinTech a friend to banks?

• Where is FinTech a foe to banks?

1. What will FinTech do to Banks?

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The answer depends on how far banks have strayed from banking

• Push factors - Banking• Bail outs.• Too complex to manage.• Public opinion / ethics.• Lack of positive innovation.• Regulatory pressures.• Corporate culture.

• Pull factors – FinTech• Dexterity.• Culture.• Economics.• Supply of investment capital.

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1. FinTech and Banking – Friend or Foe?

• What do banks do?• Banks perform an essential function in a modern economy.

They act as financial intermediaries between lenders and borrowers.

• Banks have leveraged balance sheets (Risk Asset Ratio).• Banks conduct maturity transformation (use short term

borrowing to fund long term assets).• Banks are supported by state guarantees (deposit

compensation schemes).• As a result of the above, banks offer a plentiful source of low

cost funds to promote economic growth.

1. Banks. Who Needs Them?

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Banks remain essential to a functioning

economy.

2. HORIZONTAL DISRUPTION

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• Banking ≠ Banks• Banking is deposits and loans. • A banking licence is a deposit taking licence.

• How have banks changed?• Grown horizontally from deposit and loan model in the search for better returns on regulatory capital.• Investment banking (M&A, ECM, DCM, trading), payments, fx etc.

2. The Difference between Banks and Banking.

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Deposits &

LoansPayments

Foreign Exchange

Mergers and

Acquisitions

Equity/Debt Capital Markets

BankingNon-BankingNon-Banking

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2. Horizontal Disruption will be Profound

Expect less disruption here because banks

have an in-built a competitive

advantage (cost of funds).

3. VERTICAL DISRUPTION

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3. Banks are Vertically Integrated

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Banks mine their own raw material

Banks manufacture their own products

Banks distribute their own products

Banking is own of the few vertically integrated industries left (for now)

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3. Vertical Disruption – Greatest in Distribution

Distribution

Production

Supply

FinTech has been most disruptive in distribution

driven by social media

In execution FinTech is often a supplier to banks rather

than a disrupter

FinTech has been least disruptive in supply because a banking licence is a source of

competitive advantage

4. THE FUTURE

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• Banks will continue to have a central role in the economy, but:• End of ‘too big to fail’ – removal of implicit taxpayer guarantee

and move to a regional banking model.• Higher regulatory capital levels required to absorb risk (Basel

III).• Smaller banks with less complex business models.• Reduction of big banks’ dominance over distribution and

payments.• Demise of ‘One-Stop-Shop/ Universal Bank’ ethos.• FinTech will be both friend and foe.

The further a bank moves from its in-built competitive advantage, the greater the threat from FinTech

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4. Banking’s Future

About the Author

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Juan Fred KellyDriving positive change in banking as Managing Director of Conister Bank Ltd a rapidly growing FinTech-friendly bank focused on the UK SME and retail markets. Also Executive Director of MFG PLC, the AIM-listed holding company that owns Conister Bank Ltd, Edgewater Associates and Conister Card Services.Background includes M&A, capital-raising, and debt at a variety of institutions including ABN AMRO, SG Hambros and AIB across a number of countries including Australia, Chile, the UK and the Netherlands.

Cornaa, Isle of Man