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Banking disrupters

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Over two decades ago, Bill Gates famously dismissed retail banks as “dinosaurs”. He opined that banking was essential to a modern economy but that banks were not. Since that time, many iconic brands - like Kodak, Blockbuster and Borders - have disappeared from the landscape due to their inability to keep up with digital disruption.

But the retail banking “dinosaurs” have cheated extinction and have not fallen prey to disruptive technology. Some say that this will change with the emergence over recent years of financial technology start-ups (a.k.a. Fintechs). Fintechs are allegedly set to shake up the financial services sector and give established banks a run for their money.

If traditional retail banks somehow survive the attack of the Fintechs, then it is claimed that they will be brought to their knees by the newest kids on the block – neo banks. Neo banks have no physical branches and operate using slick and simple banking apps. They purportedly bring to the table a level of customer centricity that the big guys can’t match due to their legacy systems.

The arrival of Fintechs and neo banks has been accompanied by repeated warnings that retail banks need to get wired or get left behind. Yet incumbent banks around the world still rule the roost. Newer players have not disrupted the established order and - frankly - are unlikely to. In this David versus Goliath battle, the giant banks will come out on top.

Despite the remarkable hype surrounding Fintechs, they won’t destroy traditional banking. It’s true that these nimble start-ups are ripping up the rule book and delivering innovative solutions to benefit customers. And that is a good thing. But the banks aren’t shaking in their boots because most Fintechs work in conjunction with banks, not against them.

Indeed, a growing number of Fintechs are owned by financial institutions as banks are smart enough to know a good thing when they see it. As noted by Forbes magazine: “Many Fintech startups count incumbent firms (banks) among their key investors or have been directly acquired by them”. Forbes goes on to say that:

When it comes to handling people’s money, Fintech startups run into a maze of compliance, liability, and trust issues that don’t effect (sic) the rest of Silicon Valley. These issues are far more complex in the financial sector and can sink a company like LendingClub. Meanwhile, the big financial institutions have built up decades - or even centuries - of expertise in navigating these complexities.

According to one banking commentator, banks are - and will remain - squarely at the centre of the financial universe for quite some time:

The media headlines charting Fintech’s progress in just the past year might even have you think that the end of traditional bank models is here. But that assessment is dead wrong. What is often overlooked is how much Fintech’s advancement relies on the established financial services industry. Participation and cooperation from financial institutions have helped ensure the success of payments innovations such as Apple Pay.

The Economist magazine has also opined that it is hard to see FinTechs “killing off” the banks as banks “have ingrained advantages, not least the ability to create credit more or less at whim”. Describing Fintech founders as “bright young things”, The Economist predicts that these brash “t-shirt-wearing whizz-kids” will not do to the banks what digital photography did to Kodak.

The future will see continued collaboration between Fintechs and banks. However, there is a more unnerving threat to the banking sector on the horizon. Tech companies are now branching out into financial services with “Tech-fin’’ experiencing a recent surge. The global business consulting group, Capgemini Consulting, states that:

Google, Amazon and Facebook … could become significant in the retail banking space; where decreasing consumer loyalty is driving firms to become more customer-centric, in a bid to improve retention. Whereas Fintechs don’t have the size or capital endowment to seriously threaten the big banks, Tech-fins certainly do. In this case, size very much matters.

Each of the aforementioned tech giants claim to have over a billion active monthly users. To put that into perspective, HSBC claims to have 38 million customers worldwide. The potential of any of the big tech players cross-selling financial services to customers as part of their existing offerings, could make for a daunting prospect for the monolithic banks.

The big technology players are eroding the boundaries between industries “as they seek to be all things to all people,” according to pre-eminent business consultants, McKinsey. And if they want to become bankers to the masses, your financial institution might one day look less like your bank and more like Google or Facebook.

I find it strange that banks around the world have focussed on small, nimble technology start-ups that lack brand awareness and distribution. My sense is that the real threat to banks will come from the tech giants - their digital prowess, global brands and customer access will make them a force to be reckoned with.

Watch this space as Big Tech, not Fintech, causes the greatest disruption to banking.

Paul J. Thomas, CEO


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CEO Paul Thomas