Fintech vs. Banking Concentration

Business concentration that leaves a business in the hands of a few is a danger in any economic sector as it threatens the existence of healthy competition, and therefore, also threatens the interests of consumers.

Alarm bells have sounded in the financial sector. In 12 years, we have gone from having 62 entities to 12—yes, you read that right and I didn't make a mistake In 12 years, 50 financial entities have disappeared along the way!

This reduction in the number of banking entities operating in the market is what is known as banking concentration. This process mainly occurs through mergers and acquisitions carried out among them. The causes can be found in globalization, in economic crises such as the one in 2008 which led to the disappearance of savings banks, or the role of the State itself favoring mergers and acquisitions with the aim of achieving more favorable conditions for our entities compared to international competitors. Additionally, we must add the 2018 financial crisis which has accelerated the trend due to the increasing difficulty of the banking sector to profit from its traditional model given the drop in reference interest rates to historic lows. To compete effectively, they need higher incomes and to reduce operating costs through synergies and economies of scale.

This image speaks for itself.

Map of banking concentration in Spain (Source ABC)

The saying "a picture is worth a thousand words" makes perfect sense in this case. There's no need for words to explain how things are in Spain; however, we'll use them to talk about the risks that an excess of concentration entails.

- On one hand, it can lead to situations of financial exclusion where a high number of citizens and businesses see their access to credit restricted. The banking sector reduces its ability to grant loans to families and businesses since the merging entities cannot assume double the risk of a company or individual; thus, the possibilities of financial diversification disappear or are significantly reduced.

- On the other hand, it can also imply significant long-term risks to the stability of the banking system, which may become controlled by large interconnected credit entities operating under virtual oligopoly conditions. In other words, we are facing a market with few suppliers and many demanders, or what is the same, an imperfect competition where sellers have the power to set conditions and influence prices.

- There is also a worrying systemic risk inherent in banks with excessive size that raises questions about the stability of the system and the effectiveness of tools such as recovery plans, deposit guarantees, the bank resolution fund, etc. We are talking about Systemically Important Banks that "cannot be allowed to fail" due to the enormous and serious consequences that could lead to a national bankruptcy and even in some cases international, as we have seen with Lehman Brothers, which dragged half the world down with its fall.

But not all news is bad. The emergence of Fintech eliminates barriers to entry to services that until now only a few could offer. Their specialization and the cost reduction involved in operating through the internet represent a significant change that allows them to act as anti-oligopolistic tools. The coexistence of new solutions with old ones creates a new more balanced financial ecosystem. This is essential for any society and is linked to the functioning of the business fabric, the public system itself, and the citizenry as a whole, which is why public authorities must ensure its proper functioning. In Spain, there are several bodies responsible for supervision and control. The highest authority in financial policy corresponds to the Government, specifically to the Ministry of Economy and Competitiveness, highlighting the role of the CNMV attached to said Ministry through the Secretary of State and Support for Business. With its own legal personality and full public and private capacity, the work of the Bank of Spain stands out, which is responsible for executing tasks imposed by the European Central Bank.

A separate mention is deserved by the Big Tech companies like Google, Amazon, or Whatsapp, whose enormous shadow raises unanswered questions. Many of them are starting to offer payment and financial services, posing a new threat of power concentration. For now, legal entry barriers to operate in different countries act as a brake and control. They are taking the first steps through alliances with other already established companies, but their journey is just beginning and is not leaving any actor in the financial ecosystem indifferent.

 Image by Sarah Richter on Pixabay