From a financial services institution’s perspective, disintermediation is a major risk in the current wave of transformation. This happens when the current industry offering (and revenue model) becomes obsolete by failing to adapt to new technology-enabled value propositions. Just take Polaroid and Blockbuster as examples from other industries.
And now the threat is coming to banks from fintech startups and established hi-tech companies. As the battle rages on, are the incumbent ‘dinosaurs’ of the banking world in trouble?
Fintech, high-tech & banks
Fintechs are hi-tech, banks are not. And while some fintech companies do not want to become banks, many banks will never be able to become hi-tech. For starters, bringing engineering talent into a bank is extremely challenging, as developers would rather work for a hi-tech company such as Google, Apple, Facebook, or for a fintech rather than for a bank. Hiring tech-savvy executives or architectural talent is even more challenging as the top (usually non-techie) echelons tend to look to hire the techies under them, providing no career incentive for those joining the bank.
In addition, banks tend to be slow to adapt because the executive leadership’s understanding and appreciation of technology pales in comparison to the technical roots and wizardry of those leading hi-tech and fintech firms. And where do bank executives get their understanding from? Their vendors and analysts. This information is well versed, and likely personally attached, to the current business processes — the same processes they are asked to optimize or even get rid of.
For the fintechs, the main operational activity is online and mobile. This brings operational expenses close to zero and more importantly, their customers are not burdened with these expenses as banking customers are. Yet, banks have the customer base and the customer trust, whereas most fintechs do not – yet…
So, are banks really like dinosaurs?
Many think so. In the book Augmented Life in the Smart Lane, Brett King writes:
“Within 20 years, we’ll probably see the elimination of around 40 to 50 per cent of the household names in banking today. In fact, we’re already seeing the creation of new alternative banking and financial service providers that will soon be bigger, in terms of customers and influence, than financial powerhouses like JPMorgan Chase, HSBC and Citibank.”
In my opinion, it all depends whether hi-tech and fintech companies will aggressively go after the banks’ market and customers. If they do, the banks might be doomed.
For example, PayPal provides credit to merchants and to customers at Point of Sale (POS), directly infringing on the Small Medium Business (SMB) loan business of a bank. As one leader of Apple Pay has recently told me, “…it’s far easier for a hi-tech company to learn retail payments, then it is for a bank to learn hi-tech…”
Just take a look at British financial technology firm Revolut, who have applied for a European banking license, as it bids to join a growing number of digital-only banks looking to win away customers from larger, traditional lenders.
The compliance factor
Banks know regulations and compliance. Many fintechs do not and, more importantly, don’t want to. That’s just one of the reasons some fintechs are likely to be acquired by larger, compliance-savvy fintechs or by banks. Case in point, PayPal’s acquisition of Braintree’s Venmo in 2012.
And while many banks are struggling with their digital transformation, innovation labs, ineffective R&D and IT, there is a new breed of a bank out there – a Crypto Bank. As the name suggests, it operates with crypto currencies. It is global and branchless from the get go, and promises to provide banking services, like global payments for an extremely low, nominal price. Are we now seeing the future banking 2.0? Perhaps it’s telling that the banks have recently decided to follow the mantra “if you can’t beat them, join them”, and formed a for-profit entity for blockchain supply chain.
Will banks ultimately win the war against fintechs?
Unlikely, but with compliance in their armoury – it could be the deciding factor that helps the large banks survive.