A closer look at the evidence reveals a sector that is better prepared than most to weather the storm of tech disruption. The future will be one of intense competition – but ultimately a continuation of the status quo.
Banks’ days are numbered. Fintech challengers are nipping at their heels and stripping away the most lucrative parts of their business – from loans and payments, through to foreign exchange and asset management. It’s only a matter of time before the old guard fall by the wayside and the market becomes more competitive, transparent and innovative. Vive le fintech, the saviour of customers and scourge of the fat cats.
Wrong – on almost all counts.
Admittedly, this view is a caricature of fintech evangelism. But most observers do seem to believe that banks are gradually turning from predators into prey thanks to new advances in technology. Headlines such as ‘Fintech revolutionaries storm the barricades of traditional banking’, and ‘Bankers are facing their Uber moment’, are increasingly common. Even the bankers are predicting an onslaught. ‘Silicon Valley is coming’ were the words of warning issued to shareholders last year by JP Morgan CEO, Jamie Dimon.
The trepidation is understandable. Data from Nesta and the University of Cambridge show that UK peer-to-peer alternative finance volumes have grown rapidly over the last five years, standing today at £3.2bn. Twelve percent of all lending to small businesses is now channelled through P2P lending platforms, while 16 percent of total UK seed and venture-stage equity investment comes via crowdfunding sites (up from virtually nothing a few years ago). In payments, too, startups like TransferWise and Azimo are muscling in on territory traditionally dominated by banks.
But as the old adage goes, if something seems too good to be true, then it probably is. Firstly, banks can and are taking the fight to their upstart rivals. From Wells Fargo’s rapid turnaround system for processing small business loans, to JP Morgan’s innovative QuickPay payment service, to Clydesdale Bank’s AI-powered banking app, longstanding incumbents are creating sophisticated new tools and services to counter incoming competition. Even Goldman Sachs, a firm not usually associated with retail banking, has just launched an online consumer lending portal.
While banks may not be as fleet-footed as startups, the money they have to spend on R&D is unparalleled. Goldman Sachs reportedly employs 9,000 engineers in its technology group and spent upwards of $2.5bn on tech last year. Many customers are also surprisingly wedded to banks. Trust in the financial industry may have plummeted, but people still view them as a safe pair of hands. Another huge advantage is that banks have reams of customer transaction data with which to create more refined and personalised services – an asset out of reach to their smaller rivals.
Yet competition is not the only way to handle fintech challengers. Many banks are also buying stakes in new entrants, recognising that if you can’t beat them, you can often acquire them. The Spanish bank BBVA owns 30 percent of the new digital bank Atom (launching later this year), while the French bank BPCE recently bought Fidor Bank, a key player in the German fintech scene. According to a survey by IDC, 24 percent of UK banks view fintech entrants as possible acquisitions, while 40 percent view them as potential collaborators.
If all that fails, banks have a third option: service the challengers. Witness the alternative finance market where incumbents are now channelling huge sums of loans through online platforms. Approximately 32 percent of all loans originated on P2P consumer sites now come from traditional institutions. A number of banks are also opening up their infrastructure to start-ups. Mondo has up until recently been dependent on the services of Wirecard, while TransferWise reportedly relies on local interbank money transfers.
So no, banks are not about to face their own ‘Kodak moment’ – that famous period in 2012 where Kodak (a company that created the first digital camera and employed thousands of workers) went bankrupt just before Instagram (a company with 13 employees at the time) was bought for $1bn by Facebook. Banks simply have too many entrenched advantages over their fintech enemies – or should that be frenemies, as someone recently put it to us.
But even if banks were about to hit the wall, would that necessarily be a desirable outcome? Banks rightfully fell out of public favour after the 2008 financial crash exposed deeply damaging behaviours. Yet we risk forgetting that banks provide an invaluable universal banking service that serves a range of demographic groups and regions. Compare this to fintech startups, which are often geared towards twenty or thirty-something tech-savvy customers with regular savings and borrowing patterns.
The advantage of having financial services bundled under the umbrella of a single bank is that products can be cross-subsidised. Were the most lucrative of these services to be cherry-picked by challengers, could banks feasibly maintain a universal service and coverage across all customer groups and regions that is vital for economic prosperity? And if they won’t, then who will?
While some new fintech entrants will undoubtedly go on to be genuine global disruptors and businesses of scale, the reality is that it is too early to tell whether the challengers as a whole will improve access to financial services, or whether they will create new divisions between the financial haves and have-nots.
Before getting carried away with revolutionary fervour and condemning today’s banking aristocrats to the guillotine we should pause to consider our overall social and economic interests. Perhaps a more low key British-style evolution of the industry might serve us better in the long run.
Over the coming months we will report on the key issues that our work with the RSA identifies for the sector and some of the findings from our engagement with senior professionals, regulators and other financial sector stakeholders.