Yesterday, Magellan Financial Group Ltd (ASX: MFG) published an article on Livewire saying that fintechs could challenge the business model of ASX banks.
It gave the example of a Dutch business called Adyen that smooths payments for customers and gives shopper-data insights for businesses which now has a market capitalisation that's larger than Commerzbank, one of Germany's largest banks.
Investors are essentially saying that Adyen has a brighter future than Commerzbank.
Magellan said that fintechs are shaking up all areas of banking by offering internet banking, 'crowdfunding', running price-comparison websites, hosting peer-to-peer lending and extending 'point-of-sale' loans.
Other than mortgages, the heart of the banks is the transaction account. Most of us have a transaction account with either Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).
Few fintechs are likely to go on to become a new Paypal. It's the internet giants that could become the biggest threat with distribution networks, large amount of capital big data and their IT focus.
The internet has allowed customers to do easy rate comparisons and reduced the need for branches & ATMs, which means a much cheaper business model. Fintechs don't have to worry about capital controls and they have clean reputations.
Magellan worry that some banks may struggle to earn a rate of return on equity higher than their cost of capital.
You just need to look at some of the options already arriving here in Australia like Paypal, Apple Pay and Google Wallet. Facebook is apparently working on some form of payment system as well. In the US, Amazon is challenging in nearly every non-mortgage category a bank operates.
Foolish takeaway
Banks offer a commodity-like service that can be replicated in part by many other competitors. Businesses like Afterpay Touch Group Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) are encroaching on bank territory.
Whilst I'm not saying the demise of our ASX banks will occur next year, I do think non-mortgage growth will be difficult in the future. The best option for banks may be to work with the fintechs, letting the fox into the chicken coop.
