Compared to their Tier 1 counterparts, they are more nimble and are adding meaningful volumes of new clients. And they are frequently more stable and seen as more trustworthy than fintechs by their clients.
However, there are strategic risks to this market position. For example, fintechs are more aggressive in adding new clients and faster in rolling out new features. As fintechs build trust and develop sustainable business models, they will capture market share away from established banks. On the other hand, in a financial crisis Tier 2 banks don’t necessarily have the safe haven status of Tier 1. During such a situation, there is a real risk of losing clients to larger competitors, or even worse, experiencing a bank run at a critical moment, particularly if regulators decide to focus on protecting bigger banks.
And finally, even in business-as-usual situations, Tier 2 banks are facing unsustainable costs of compliance. This includes the constant investment needed to maintain and upgrade systems due to evolving regulations. Frequently, costs that are assumed to be one-off prove to be ongoing as banks that ramp up teams and investments through remediation challenges fail to bring down costs afterwards. For example, with remediation challenges, banks often hire consultancies such as KPMG or Deloitte to perform manual document renewals, or comb through data to fix inconsistencies.
