‘The sky is falling in on the banking industry’. It’s the kind of statement we’ve heard a few times in recent years, based on the idea that new competition and a wave of new entrants are set to erode bank’s profit margins and drag consumers away in droves.
Is it a fair analysis? I’m not so sure.
The latest McKinsey banking report is a case in point. It portrays banks as facing “a high-stakes struggle” to defend their business model against digital disruption. As reported in the FT, McKinsey said technological competition would reduce profits from non-mortgage retail lending, such as credit cards and car loans, by 60 per cent, and revenues by 40 per cent over the next decade.
I don’t dispute that the industry faces changes, not just from new entrants and evolving technology but also from regulatory developments and changing customer behaviours too. These not insignificant challenges – for example, the EU’s regulatory changes, which will limit card interchange fees will, arguably, have a dramatic short-term impact on credit card revenues.
But I also think that the largest commercial banks are more dynamic and resilient than many give them credit for. For example, I’d argue that not enough recognition is given by the media to how much banks have already done to digitise their businesses.
In retail banking, for example, 22.9 million banking apps have been rolled out in recent years. This is a service that barely existed five years ago, yet, for many people in Britain, they are the primary way that they engage with the emerging digital world. And we should remember that, in many cases, this capability has been overlaid onto legacy infrastructures, with all the challenges that this entails. These banks now deal with millions of people logging in every day, checking their balances and accessing basic banking services, on an infrastructure built from scratch and largely without incident.
Another area where the banks have led mass-market innovation is in payments. The Faster Payments System is revolutionising the payments infrastructure and facilitating new products such as Paym and Zapp. These are critical national infrastructure programs which underpin initiatives such as mobile ‘phone-based payments, services which would be unthinkable without the banking industry’s investment and support.
There’s also a common idea that the new entrants exist to challenge the traditional banks and perhaps, over time, even replace them. I’d suggest that this is not necessarily the case. Many start-up entrepreneurs, in their most honest moments, will admit that they would be just as happy to work in partnership with existing providers or even sell their businesses to them, as to compete with the big four. And banks have deep pockets and time on their side, assets which are always helpful when deciding whether to ignore some of the new entrants, work with others or just buy out the best ones.
In my view, banks have already demonstrated that they can drive mass-market innovation. They continue to take stock of technological changes and new entrants coming to the marketplace and regularly respond. Perhaps that’s why account transfer statistics suggest that the vast majority of consumers will still take a lot of persuasion to leave their current banking provider.
I do agree with McKinsey’s conclusion that banks must do all that they can to maintain the front-of-value chain relationships with customers. And I also agree that, when it comes to the back-end processes, there is still much to do. There are plenty of opportunities for third parties to work with the industry, in a mutually beneficial way.
So let’s welcome the new entrants and the effect that they may have to continue the wave of innovation in the industry. But let’s also recognise that bank cultures are evolving. They can see that society is changing and are investing heavily in responding to the challenges. Rather than talking exclusively about how much trouble banks are in, let’s spend more time focussing on what the industry has done well to date and how it continues to drive progress at a national level.
Whatever happens next, retail banking is an exciting place to be working right now.
Image credit: Level 39
In addition to advising numerous UK and continental European financial services organizations, Anthony has also held senior line management positions, including as Director of Strategy for a FTSE-100 bank; Deputy Managing Director of a UK commercial bank; and Managing Director of a UK asset finance company. He has also worked in central government, advising Cabinet ministers of the development and passage of company legislation.
Anthony joined Fujitsu in February 2012.