Banks are not stupid. They got the memo about their world turning digital and know, for example, that mobile is big and ‘millennials’ do things differently. They are fully engaged.
Not only will Brexit not change any of this, it makes digital transformation even more urgent as banks must respond to increased volatility, rapidly changing market conditions, changing regulatory environments across Europe and increased pressure on operating margins. The turmoil in financial markets from the UK seeking a different relationship is just a speed bump in financial services transformation to a digital future.
Challengers, however nimble and focused, may dent the fortunes of the established giants but won’t bring them to their knees. What we are more likely to see is partnerships, and for one simple reason: banks have the customers, fintech has the expertise. Each needs the other. There will be issues, but not total war.
“What we are more likely to see is partnerships, and for one simple reason: banks have the customers, fintech has the expertise.”
One major reason for co-operation is that scale is important, even for new entrants. In order to be competitive, online banks need to have at least two million customers each. To put that in perspective, Lloyds Banking Group already has 11 million online banking users, including more than 6.5 million active mobile users.
Anyone who doubts where banks will be in relation to competition need only ask one question: ‘would I put my salary into that challenger bank?’ The answer to that is what underpins the future. My belief is that truly novel entrants will be offering ancillary services, with only one or two breaking through to fully rival the trust given to the major institutions. In other words, banks need to be afraid of eachother, not challengers.
They are already further down the road to what is without question a fully digital future than they often get credit for. Mobile banking is happening now and big organisations such as Lloyds, Barclays and Halifax, already have apps that rival anything on the market from disruptive arrivals. These have excellent customer interfaces and also segment between consumer and business markets.
Whilst the technological challenges seem formidable if confronted, they appear less so if side-stepped. Some financial institutions are sensibly bypassing their core computer systems to create parallel structures focused entirely around digital offerings, not only hosting their own platforms but also those developed outside that might offer complementary services.
This makes better sense than trying to disentangle and rework existing core systems, which are finely calibrated to deal with compliance requirements and are highly complex pieces of software engineering.
The head of IT at a major bank said that he went to senior executives and asked them how much they thought it would cost to replace just one of their core systems. ‘Forty million dollars,’ came the reply. ‘Try $400 million,’ he told them.
Although conservatism is their strength, not a weakness, banks are also getting nimbler at making decisions about which technologies will work for them. Santander, for example, has put one person in charge of development and acquisition of fintech.
There is also the further future to look at, particularly implications from the ‘internet of things’. Almost daily, appliances are turning into e-commerce devices, gathering and controlling flows of data. Financial services businesses know how to monetise information, and are working on doing so, which means big opportunities for banks.
One prediction can be confidently made: processing transactions will soon not be a way to make a living. Margins are wafer thin and being driven down further. Banks will have to do something else. So anything that helps them to monetise data will be valued.
Because of new entrants chipping away and the huge potential rewards, the future for fintech is still incalculable in terms of its impact on the banking sector. But what’s quite clear now is that the biggest rewards will come from co-operation, rather than challenge.
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