While no aspect of the traditional banking sector will be safe from financial technology (fintech) firms over the next 5-10 years, there is a lot of room for collaboration between the two sides, says post-trade solutions provider Depository Trust & Clearing Corporation (DTCC).
While it is hard to predict the areas of banking that are more likely to be substituted by non-banking players, the potential for a meaningful shift toward the latter over the next 5-10 years is significant and global, said Michael Leibrock, chief systemic risk officer of DTCC.
The effects of these technologies is highly dependent on the regulatory environment.
In the US, the proportion of investment in collaborative fintech companies has grown from 37% in 2010 to 83% in 2015. In the UK, where regulations favour players looking to compete directly with the industry, this trend is reversed, with more than 90% of investment channelled directly to competitive fintech companies, said DTCC.
Banks have long been using technology to automate processes. But now this technology is removing intermediaries, reducing financial service aggregation and decentralising networks in a way that "goes beyond efficiency gains", said Mr Leibrock.
Cost competition is driving the rapid development and adoption of fintech. As banks and other institutions vie to cut costs, technology has lowered the barrier to entry for non-financial firms.
Most fintech companies that focus on core banking activities rely on financial institutions or partners for funding, while enabling these more established players to expand their customer bases into traditionally untapped segments.
In India, for example, big banks like Kotak Mahindra Bank and HDFC are working with startups like Singapore-based Lendo to provide credit scores to previously unbanked sectors of the population.
By producing credit scores that rely on, among other things, social media activity, phone contacts and online shopping habits, these startups are helping big players lower their lending costs and attract customers.
For banks, the real threat may be players that can independently operate in capital intensive sectors. While a few fintech champions have started amassing balance sheets that rival those of traditional financial institutions, their effect on the banking industry has not been wholly negative.
Alibaba-controlled money market fund Yu'e Bao, for example, helps increase market liquidity while providing customers with high interest rates (currently 2.3% per week) on accounts that offer instant liquidity.
Founded four years ago, the US$165-billion (5.38 trillion baht) Yu'e Bao is the biggest player of its kind, after surpassing JP Morgan's US government money market fund in the first half of 2017. It is larger than the next 10 money market funds in China, two of which are controlled by ICBC, the world's largest bank by assets.
Most of the fund's assets (from the digital wallets of Alipay customers) go toward the interbank loan market. A large proportion of this funding is channelled to smaller banks that have found it hard to compete for cash with the likes of ICBC.
Yu'e Bao made its entry into the market in 2013, where interbank rates hovered around 10%, the highest in recent history, which allowed it to offer lower lending rates to banks, while offering interest rates to consumers as high as 6.5%.