Why The Tech Revolution Is Yet To Truly Disrupt The Banking Sector And If It Ever Will?
Cheques still exist. Around 10 years ago I opened a new bank account. When the process was complete I got a debit card in the post. I also got a cheque book. At the time, 10 years ago remember, I found myself thinking ‘who on earth still uses cheques’!?
About 5 years later, an advertising client of my own company – an online media in the personal finance and investment space – used to pay us by cheque. We found it ridiculous. It was ridiculous. They were a financial services company whose main shop window was the internet. And they still paid service providers by cheque. Until we gave an ultimatum that we wouldn’t accept cheques any longer and if they wanted to continue to work together it would be bank transfer.
I still don’t really know why that company’s preference was to pay by cheque, though I have my suspicions. But in 2019 cheques still exist. There doesn’t really seem to be any logical explanation why, other than ‘old habits die hard’, and the additional security and payment time lag this relic from a bygone era offers those who write them. But cheques are a symptom of a wider reality – the banking sector has proven one of the slowest to be updated or ‘disrupted’ by new, more efficient, technology-centric solutions.
Sure, ‘fintech’ financial services exist and there has been a reasonable level of VC investment in the sector. But we’re yet to witness a nimble tech start-up backed by the gazillions of venture capital quickly rampage through an entire business nice and then vertical, devastating the market share of incumbents. There’s no financial services Uber or Airbnb.
Fintech – When Will It Genuinely Come of Age?
There’s been chatter around ‘fintech’ for years. In fact, it’s the banking sector that is usually the main financial backer of the ‘accelerator’ and ‘incubator’ programmes for start-ups that are designed to help promising start-ups find their feet. There are even now a number of fintech ‘unicorns’ – companies valued at over $1 billion. Several of them come from London, which, more so than Silicon Valley, has established itself as the fintech capital of Western markets.
But there’s been no real sea-change to the industry’s status quo. Millennials are more likely to use Uber than any other taxi service. The company will shortly IPO at a near $100 billion valuation. The travel and tourism sectors have been upended by tech companies such as TripAdvisor, Booking.com and Airbnb. Television and cinema by Netflix and books and commerce by Amazon. Convenience food and pretty much every other service niche you can think of is dominated by tech and digital first brands, most of them looking elderly if they are approaching a decade in business. But banking? Not so much.
Yes, over the past few years fintech financial services and banks such as Monzo, Starling, TransferWise and Revolut have gained some ground. But they’ve not really come close to posing any kind of genuine threat to traditional banks.
Even those who have accounts with these new online only banks tend to use them as secondary accounts for limited purposes such as better exchange rates when travelling. But very few have their salaries paid into them and use them as their primary bank account. The question is becoming whether new fintech banks will gain enough traction over the next few years to challenge the tradition banks and building societies?
Or will they will prove to be little more than enough of a potential threat to catalyse an upgrade of traditional banks’ own tech, online offerings and processes sufficiently to continue to dominate the sector? 150-year old mutual, the Monmouth Building Society, has recently announced its own digital banking app and current account – one that will resemble those of the fintechs and aims to compete with them. Monmouth doesn’t even currently offer current accounts - just savings accounts, mortgages and insurance. But it has financial resources and an established reputation.
Why Has The Banking Sector Held So Firm Against Tech Usurpers?
One of the biggest reasons why the banking sector is and will prove more resistant to the kind of complete disruption as many other industries have gone through is that the entire Western political and economic system is set up to protect them. Does anyone, except its owners and drivers and their family and friends, really care if Uber’s rise wipes out a cab company? Arguably and probably not. The same can be said for other companies that have fallen by the wayside, swept out of the way by a digital tidal wave backed by Silicon Valley millions.
Systemic Support For Incumbent Banks
But banks? When the Royal Bank of Scotland got itself into trouble in the run up to the 2007/08 financial crisis, through terrible mismanagement, greed and playing hard and fast with the funds of everyday clients, the UK government pumped in a staggering £45.5 billion to bail it out. Lloyds received £20.3 billion to keep it afloat. Despite the fact the banks had brought their troubles upon themselves, the argument for bailing them out was simple – if the banks went under, millions of ordinary families would lose their savings, countless businesses too and the whole country’s economy face devastating ruin.
A total taxpayer-funded war chest of £500 billion was put on the table that the UK’s imperilled banks could resort to if they needed. The same thing happened across Europe and the USA. Blockbuster Videos probably would have managed to pivot its business model to fend of Netflix with that kind of safety net.
We haven’t yet gotten close to that stage. But what hope do the fintech banks have when, if they are successful enough to take enough market share to endanger incumbent banks, the system won’t let them fail for fear of the damage it would do to ordinary account holders and the wider economy?
Another big obstacle fintech entrepreneurs and their investors face is hugely onerous regulatory environment of the financial and particularly the banking sector. That’s become much more pronounced since the 2007/08 banking crisis and enough to put enough off to significantly defer the start of the smartphone era in the banking sector.
But the regulatory moat protecting the sector is now in danger of being breached. Fintechs are finding ways of getting around it. A popular route, one taken by both Revolut and TransferWise, has been to first gain traction in less regulated but higher margin financial services such as currency exchange and international transfers. Their lack of branch overheads and more innovative tech-centric models allowed them to significantly undercut traditional banks in these non-core but lucrative services and build a customer base. That has allowed them to attract enough investment to subsequently expand their range of services and apply for banking licenses.
Others, like Starling Bank, Monzo (founded by ex-Starling employees) and Germany’s N26 took a more direct route and started with restricted banking licenses and offering current accounts. But offering unprofitable current accounts are again not the end goal in terms of building a sustainable and profitable banking business. They are the entry point to the far more lucrative business of lending and insurance.
Big Tech Is Moving Into Finance
Perhaps an even bigger threat to traditional banks than upstart fintechs is ‘big tech’. In Asia, the big tech companies moved into payments years ago – most notably Tencent through its WeChat messenging app, which is the biggest in Asia. China’s tech giants have integrated payments apps into their wider digital ecosystems of ecommerce, social media, food delivery and ride-hailing.
Western tech goliaths like Apple, Google and Amazon are now going in the same direction. Apple recently announced that it will launch a credit card in partnership with Goldman Sachs. The card will exist in a plastic and digital-only hybrid format with the latter used for online purchases.
It makes sense for Apple to partner with an experienced financial services partner for now. But what is the likelihood that Goldman Sachs might one day be cast aside as Apple’s former microchip manufacturer Qualcomm was when the company decided it had the intellectual property and talent to bring that part of operations fully in-house? Amazon and Google are similarly building out their payment apps and increased integration into their own ecosystems can be expected. For now tech companies are unlikely to start offering other banking services beyond payments but it is another element of the traditional business of banks being eroded.
Payments data is also vital to financial services companies in making their services smarter, more efficient and sustainably profitable. It is the window into customer behaviour. If banks lose that key insight, their task of retrenching will become that much harder.
Is The Fintech Revolution Tipping Point Now Imminent?
How the fintech revolution of the banking sector plays out is still very much up in the air. Other than their integral role in the health of the global economy, a big advantage, one tied up in the first, is that traditional banks have the relative trust of account holders. They’ve seen that even in a very bad situation their money is protected.
It will take a long time for confidence in fintech banks to reach the same place. Type ‘Monzo’ into Google and right under the bank’s website listing are four frequently asked questions. One reads ‘is Monzo secure’? But it is coming. 15% of 18 to 23-year olds in the UK now use an app-only bank and that can be expected to increase as the next generation comes through.
The banking sector is being revolutionised by fintech and the pace of that change will pick up from here. It’s hard to argue that the traditional banking sector is not technologically backward, their businesses inefficient and a fat cat corporate mentality not often still visible throughout management structures.
Traditional banks offer expensive services, which are often poor from the customer’s perspective. They will ultimately drive change and that will benefit the global economy. The Economist reports that if traditional banks were to cut their overheads by a third the result would be the equivalent of an additional $80 (£61.33) for every person on the planet. The reallocation of that capital would be a shot in the arm for moribund global economic growth.
Transition in the banking sector does have to be more carefully managed than in possible any other sector. Technology companies can fall into dubious practises just as much as banks can and also tend to trend towards monopolies or oligopolies. If that were to unfold in banking it could be dangerous in the long run. But managed correctly the fintech revolution in banking and other customer services should lead to a hugely more efficient and customer-friendly system.
Whether that is one composed largely of new fintechs, traditional banks that have modernised or mix shouldn’t be of huge import to the end user. But the process of evolution towards that point, however it plays out and if the dangers are mitigated, should ultimately benefit banking customers the world over.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.