Technology is about to transform the banking sector. A September 2013 Aite Group survey of business users showed that many of them already use alternatives to banks, for everything from electronic payments to cash flow forecasting.
Can you blame them? Do any customers love their bank? Have any of us who struggled with the impact of the 2008 crash forgiven the senior bankers who collected eye-watering bonuses? Well, it might be payback time. New technologies are preparing to take a big slice of the traditional banking business.
Bankers have been slow to recognize the technology threat, but it's becoming visible to some of them. Speaking at June's Future of Financial Services conference in London, Barclays chief executive Antony Jenkins warned: "We are on the leading edge of a technology revolution. You can't see it, but it's coming, it's coming hard, and it's coming fast." Here's the problem, though: The banks aren't on the edge of a threat -- the threat is already here.
What's got the banks spooked is your smartphone. The 2 billion smartphones we use every day have already changed the industry: People use mobile banking services 24 times a month on average, while making a branch visit twice.
These are changes in customer preference that directly threaten old banking models. As consumers become more inclined to use banking alternatives, they become more willing to replace traditional bank-based financial products with offerings from others. Those non-traditional offerings are covering every offering of the existing bank industry: PayPal or Square, international cash exchange services such as TransferWise, crowdfunding, peer-to-peer lending and the imminent arrival at scale of mobile payment services from the likes of Apple, Google and Facebook. There are even crowdsourced services offering property loans. Banks are facing some bitter competition.
Jamie Dimon of JPMorgan Chase is certain that since his bank operates "one of the largest payments systems in the world," it is "going to have competition from Google and Facebook and somebody else."
These new operators, "want to eat our lunch," he warns.
Ian Narev of Commonwealth Bank last year warned that these new contenders, "can pick particular slivers [of the banking industry] as a result of the application of technology into financial services and compete."
Banks simply aren't agile, and there is a real danger that their anachronistic, silo-based management structures will hobble their efforts to become multichannel financial services entities. You see, numerous reports suggest that delivering an integrated all-channel approach demands that the companies that embrace it break down barriers between departments -- barriers that have characterized most business efforts until now; success demands change and flexibility. You may know you are running different channels, but customers don't. This transformation will be especially difficult for banks, which are inherently slow to change, but can no longer avoid the need to do so.
Christine Barry, research director at Aite Group, told Computerworld, " I think new competitors in the market are good for the industry. They are forcing banks to evolve their strategies and broaden product offerings or risk having their online sites viewed as simply a place to check balances and transfer funds. The customers will ultimately benefit from better bank offerings."
And in a press release, Ralph Dangelmaier, president of Global Markets and Services at ACI Worldwide, said, "Consumers expect to shop and transact anywhere, at anytime, making mobile the hottest area of opportunity for financial institutions, processors and retailers today." He urged banks to plan strategically to make mobile part of their overall channel strategy, alongside ATMs, point of service, branch and online banking. They should "implement innovative mobile services," he said.
To achieve this fast, some banks are buying their way into partnerships with technology firms. HSBC, UBS and Barclays are increasing investment in the financial technology (fintech) sector. Deutsche Bank plans to launch an online platform through which fintech startups can pitch their ideas. Such partnerships let banks focus on the fiscal infrastructure while their agile fintech "frenemies" develop new products and services.
The pace of change is rapid and has inherent dangers. Speaking in June, Financial Conduct Authority chief executive Martin Wheatley warned bankers that the pace of technological change will be of an "entirely different order" to anything seen before, warning that "the concern is technology within financial services becomes a sort of Wild West." After all, you have to wonder whether the level of regulation applied to the new fintech players will match the oversight now laid on the banks. How effectively can global regulation ensure that these new financial players offer the same level of protection to a customer's financial assets?
Perhaps it's too early to call time on the banking system. Banks do have some good advantages to help them survive the smartphone disruption:
- People already trust banks with money and are less certain of new incumbents.
- Banks can offer a single entity (online, physical) for banking transactions.
- Banks can leverage their existing scale to offer more competitive pricing models than new industry arrivals.
"Not all banks will move quickly, though, so there will be opportunities for banks to differentiate themselves," said Aite Group's Barry. "As such, there may be changes in market share."
That's an understatement. In my opinion, the pace and scale of change is more rapid than most banks are inherently capable of navigating. Not only this, but banking customers are less loyal to their banks than ever before, having been denied credit, foreclosed against and made to endure global austerity measures ostensibly to support relief efforts to keep the banks in business. All these factors mean we are entering a period of major consolidation and uncertainty across the global banking industry, which will bring a wave of uncertainty across the global economy with which these entities are so entwined.
What's going to happen? Not all of our existing financial services firms are going to make it through this game, and I don't believe many of us will weep for the passing of those that fail. I think it's certain we'll lose a few household banking names.
Jonny Evans is an independent journalist/blogger who first got online in 1993. He's author of Computerworld's AppleHolic blog and also writes for others in the U.S., the U.K. and Europe. Winner of an Azbee Award in 2010, Jonny enjoys new and disruptive technology and likes music almost as much as he likes his large and shiny dog.
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