In central and eastern Europe, some embattled senior bankers are taking comfort in the thought that the Covid-19 crisis might help them see off the challenge from fintechs and other non-bank players.
It is easy to see why. At any time, banks’ biggest assets in the battle against tech rivals are their balance-sheet heft, track record and customer trust. In a non-financial crisis, the value of each of these assets increases exponentially.
At times of turmoil, trust is clearly key – and banks’ pivotal role in the economy makes them the go-to partners for governments looking to deliver financial support to businesses and gives them access to more or less unlimited central bank liquidity.
Banks in CEE were particularly well placed going into the Covid-19 crisis. As well as boasting some of the strongest balance sheets in Europe, and ample experience of market turmoil, they are also among leaders in terms of technology.
A surge in usage of digital banking channels as customers eschew cash and embrace e-commerce has thus played to their strengths. Not only have they been easily able to handle the increase in volume of online and mobile banking, but clients taking the digital plunge have access to highly sophisticated and accessible platforms.
Fintechs’ first crisis
By contrast, fintechs in the region are heading into their first crisis and facing up to the prospect of a shortage of equity funding as investors either retreat from startups or switch their focus to newly fashionable sectors such as healthcare and biotech.
Yet it would be a mistake to write off the sector just yet. For one thing, the shift to digital is benefiting fintechs in CEE as well as banks. Those in non-lending areas such as payments, e-commerce and compliance have already seen a substantial increase in demand for their products.
Even in the lending sphere, where banks might expect to have the upper hand as the distributors of government and development-bank largesse, fintechs have something to offer.
It would be a mistake to write off the sector just yet… the shift to digital is benefiting fintechs in CEE as well as banks
Few have built their business models on going head to head with the banks. Rather, they have targeted niches underserved by traditional lenders, such as short-term credit for e-commerce and working capital for smaller companies.
Their models also have the advantage of being based on non-collateralized lending and fully remote due diligence, something that has become even more valuable in the current crisis and that even the more advanced banks in CEE struggle to offer.
The obvious challenge for fintech lenders will be funding, given that – presumably – the sector is unlikely to be given access to central bank liquidity any time soon.
Again, though, the outlook may not be as bleak as it first appears. As the inevitable post-crisis hunt for yield gets under way, CEE’s unique position as a halfway house between developed and emerging markets will likely prove appealing for debt investors seeking returns without too much risk.
Trying to pick winners this early in the crisis is a mug’s game – but banks would do well not to write off their tech competitors just yet.
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