Recently within this Dickens-like environment, there has been a lot of conversation on the Fintech boom and the prospects of them taking over the banking industry. What’s your perspective on Fintechs?
There is certainly a real danger that traditional banks become marginalized if they don’t respond to a changing environment. Industrial history is littered with storied names that failed to grasp the significance of innovation and ended up ceding dominant positions to firms that were started in garages. The skeptics will respond that banking is different, and that banks benefit from a protected and privileged place in the economy—for example, access to the national payments system. In many countries banks have also had a virtual monopoly on the provision of capital to consumers and small and medium enterprises, and if they do get into trouble, they have been able to turn to the state as a lender of last resort. But with the exception of offering insured deposit accounts, most of these privileges are now disappearing.
In some markets like the United Kingdom, the government and the regulators have explicitly moved to dismantle barriers to entry and encourage competition from new entrants. In other markets like the United States, new entrants have relied on innovative technology and business models to force their way into the industry and take bites out of profit pools like payments and wealth management, without going after core transaction accounts. However, despite lakes of digital ink being devoted to the Fintech revolution, I think the reports of the demise of the traditional banking industry are greatly exaggerated. While a variety of reports indicate that anywhere from 20 percent to 80 percent of the industry’s revenue could be at risk from new entrants, what most of these reports don’t focus on is the likely response of the incumbents. While their short-term performance issues may have dulled their reflexes a little, I think you are beginning to see leading players in the industry wake up to the threat and be a lot more active in their responses.
Considering changes occurring in the industry’s competitive playing field, what advantages should traditional banks be exploiting to protect and strengthen their position?
One of the biggest advantages banks have is customer trust. There is a paradox here, in that when you ask customers which industries they trust to do the right thing, banking comes close to the bottom of the list. Yet when you ask those same customers who they trust with their money and personal information, banks place near the top of the list, well ahead of other custodians of our personal information like telecoms, social media and consumer tech firms.
Traditional banks have also had a broader view of our financial health and transaction history than any other player in the economy, so the question is, what value can that breadth of information deliver to bank customers? Unfortunately, research shows that very few customers currently feel they have a relationship where their bank provides helpful, proactive and customized financial advice. As the success of Amazon shows, customers are open to being nudged, guided and assisted in making better decisions—yet most banks have not shown that they can harness the power of broad customer relationship information to deliver real value to their customers beyond traditional product silos. Banks are working hard on this problem, but they are often hindered by a tangle of legacy systems that don’t talk to each other and that struggle to provide even basic real-time relationship information across products and channels.
The danger for banks is that the trust advantage they have is fast eroding, with younger customers far more willing than their parents’ generation to consider banking with an Apple, Google or Facebook. So the clock is ticking for traditional banks to show that they can deliver the type of value across products and channels that prevents them being picked off by simpler and more nimble competitors.