Fintech firms pose a long-term threat to the banking industry, particularly if they’re allowed to compete on an uneven playing field, Fifth Third Bancorp executives said Thursday.
The Cincinnati company has invested heavily in its own digital capabilities in order to improve efficiency and customer service, but is increasingly concerned about nonbank competitors poaching their customers, Chairman CEO Greg Carmichael said.
“There is a threat there that we are…watching,” Carmichael said, noting that these upstarts are lightly regulated and don’t face the same restrictions, such as capital requirements, as banks.
Carmichael’s comments echoed those made by JPMorgan Chase Chairman CEO Jamie Dimon a week ago while discussing his company’s fourth-quarter results. Dimon took aim at fintech firms benefiting from “unfair competition” and particularly called out Plaid, a bank data aggregator, for “improperly” using data.
Plaid, which aggregates consumers’ banking data and feeds it to other fintech firms such as Venmo, has drawn ire from other traditional banks over data privacy and security issues. PNC Financial Services Group and TD Bank have also sued Plaid for trademark infringement.
Dimon also expressed concern about competition from consumer-focused challenger banks, some of which have generated substantial revenue from debit-card swipe fees. The Durbin Amendment, a provision of the 2010 Dodd-Frank law, limits the fees that banks can charge to retailers when customers pay with a debit card. Banks over $10 billion in assets are capped at about 22 cents per transaction, while smaller lenders can charge up to 54 cents per swipe. Some fintech firms, such as Chime, get around this by partnering with smaller lenders to offer debit cards.
A number of fintech firms have seen explosive growth in the past year, and some consumer-focused fintechs, including Varo and SoFi, have also recently applied to the Office of the Comptroller of the Currency for banking charters.
“If they get access to the banking system… that could create some stress for us that I’m very concerned about,” Carmichael said.
Tim Spence, who was recently named president, said the company “pay[s] a lot of attention” to its competition in the market and that includes fintechs alongside traditional financial institutions.
Despite the heightened competition, Fifth Third continues to bring in new customers.
The $202 billion-asset Fifth Third added households at a rate of about 3% last year in markets like Chicago and the Southeast, giving executives confidence in the company’s ability to compete against rival banks and upstart fintechs, Spence said.
Fifth Third executives said they expect loans to increase by 2% to 3% in the first quarter but that low interest rates will put continued pressure on net interest income. Fifth Third is expecting commercial demand could pick up in the second half of the year, particularly if the coronavirus vaccine rollout is successful and the economy starts to improve.
Fourth-quarter net income fell 18% from the same period in 2019, to $604 million. Earnings per share of 78 cents came in 10 cents higher than the mean estimate of analysts surveyed by FactSet Research Systems.
Net interest income declined 4% to $1.2 billion due to lower interest rates and a decline in commercial loan balances. Fifth Third’s net interest margin narrowed 69 basis points year-over-year to 2.58%.
Noninterest income fell 24% to $787 million. Mortgage banking revenue tumbled 66% to $25 million, due to lower originations and some capacity pressures, and deposit service charges and card fees also declined year over year. Commercial banking revenue rose 11% to $141 million on higher M&A advisory and corporate bond fees.
Fifth Third released about $13 million in loan loss provisions during the fourth quarter, in comparison with a provision of $162 million a year ago. Net charge-offs totaled $118 million in the fourth quarter, compared with $101 million in the prior quarter and $113 million a year ago.
