Banks are struggling to respond to the threat of fintechs that have ushered in a hyper-competitive ecosystem of startups and alternative lenders.
The British first made legal the act of charging interest on money in the 16th century. However, that business model now finds itself under the greatest assault since its inception.
On the one hand, global dotcoms like Google, Facebook, Apple and Amazon – and Alibaba and Tencent in China – are sitting on mountains of cash and the very high regard of their customers. On the other, the explosion of fintechs has ushered in a hyper-competitive ecosystem of startups and alternative lenders focused on delivering vastly superior customer experiences at better prices.
Stuck in the middle, banks struggle to respond to this threat, encumbered by complicated legacy systems, outdated distribution models, organisational structures based on products not customers, and regulatory and compliance overheads that the newcomers can craftily avoid.
And the regulators themselves seem disinclined to help. In Australia, ASIC has made it clear it will come down on the side of the consumer and of innovation. That’s a message some in the banking sector are still struggling with – the harsh realisation that the rules are not there to keep banks safe from competition but to keep us safe from the banks.
Follow the money
The scale of what is at risk has been clearly laid out by companies such as McKinsey & Co, Bain and more recently Macquarie Equities in Australia. In 2014, analysts at Macquarie belled the cat on the local bankers suggesting that as much as $27 billion was suddenly contestable due to digital disruption. In particular, the analysts suggested a third of local banking revenues were at risk on two fronts: payments and lending.
If anything, the situation has become even more heated and competitive with little evidence the banks are really moving fast enough to respond. Only CBA received a leave pass from Macquarie at the time, while the other ‘big three’ had their profits forecasts downgraded.
Two new reports highlight the continuing disruption of the banking market. Firstly, Deloitte has described the massive potential of blockchain technology, which developed out of the Bitcoin ecosystem to upend traditional business models.
In a report called Banking reimagined: How disruptive forces will radically transform the industry in the decade ahead, Deloitte researchers say: “The innovation that is possibly the most disruptive of all is blockchain technology. A distributed ledger concept, conceived originally for Bitcoin but now applied beyond the cryptocurrency world, blockchain has been called ‘remarkable’, ‘a foundational technology’, and ‘a key technological innovation’, much ‘like the internet’.”
They note that blockchain could have a transformative impact on financial architecture, including payments. Of course in fairness to the banks, they are not sitting idly by as this happens and most top-tier banks are already actively investigating blockchain for their own purposes.
A second study – this time by the University of Cambridge – looks at the success that crowdfunding platforms and peer-to-peer lenders have had capturing customers, particularly in the lower to mid-tier space. That study, focusing on the US market and called Breaking new ground: The Americas alternative finance benchmarking report, suggests the online financing markets grew from $US11.68 billion to $US36.49 billion in 2015.
Even here however there is evidence that the empire is striking back. As the digital industry blog Which-50 noted in its reporting of the study: “Institutional investors were not locked out of the growing US market. Between 2013 and 2015 they funded over 72 per cent of marketplace/P2P business loans and 53 per cent of marketplace/P2P consumer loans. The capital was sourced from ‘mutual funds, pension funds, hedge funds, family offices asset management firms and traditional banks.’”
Locally, however, there remains a complacency around both the potential and speed of disruption. Bankers we speak to are sceptical and dismissive not only of the new and alternative lenders but also of their customers who they claim only visit the alternative financiers because the banks won’t touch them.
That is a dangerous view for them to hold. Ultimately the core business of a bank is determining who is a good bet for a loan and that is increasingly about data as much as personal judgement. If you were handicapping the market and it came down to data, would you really bet your money on the tech stack of a national bank in a mid-tier economy against the sheer scale and technological brilliance of a Google or a Facebook?
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