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PEOPLE need banking; they don’t need banks.
This bold statement was made at the Next Bank Asia conference recently, exploring the future of banking. A big theme was the rise of FinTech companies and the possible disruption of traditional banks.
FinTech is a collective name for technology or technology companies within financial services.This can be in the form of digitisation of services such as merchant payments (for instance Apple Pay or Square), cross border transfers (World Remit), or even wealth management (Nutmeg).
There has been an explosion of FinTech startup companies over the last three years, which provide banking services in direct competition to traditional banks. Although some companies only focus on technology development, others such as Number26 – a fully online German bank providing zero fee banking – provide financial services such as bank accounts and loans.It is estimated that in the US alone, there are more than 8 000 FinTech startups at the moment, with a further estimated $30bn in venture capital being invested into these companies. FinTech is definitely a hot growth market at the moment, with 36 of those companies currently valued at more than $1bn.
But is this enough to disrupt banking as we know it? Some of the biggest hurdles these FinTech companies face is dealing with financial regulations and scaling their companies to obtain large enough customer bases. Some of these FinTech startups tend to flout regulations as long as possible, arguing that regulators are not adjusting outdated requirements to keep up with new business models being enabled by technology. Banks, on the other hand, think that regulators are not doing enough to clamp down on these startups who do not have all the regulatory burdens large financial institutions are sitting with.To overcome regulatory constraints and to access large customer bases, many successful startups either partner with traditional banks or allow themselves to be acquired outright.
So should banks be worried? Industry disruption takes a long time to happen, but as Kodak can attest when digital photography came in, if you ignore it for too long, then it can mean the end of your business.I see two scenarios that banks need to be mindful of.
Scenario one: Large technology companies such as Google and Apple have already started entering the financial services space through payment enablement capabilities.
These are companies with deep pockets and if they want, they can really disrupt banking as we know it. They are also not shy to buy up startup companies to gain access to new technology.
For now, they are only focusing on a limited scope in the payments sector, but this may change in future, taking away revenue from banks.
Scenario two: At present, most FinTech startup solutions are specialised and disparate.When you are a banking client, you get the convenience of multiple banking services and products consolidated under one service provider. Consumers don’t necessarily want to engage with five different FinTech applications to access five different services.
What is required is a consolidation platform, bringing services together (think Amazon, but for banking). This will bring about convenience and most probably better price transparency, something banks don’t always provide.
Will this be enough to see the end of banks? Maybe not.Banks still have the opportunity to transform themselves through innovation to remain relevant. They do however need to recognise that they are competing against technology companies without legacy systems and structures holding them back, making them much more agile.
As companies such as Uber have shown, disruption to an industry can happen much faster than you think.
Twenty years from now, banks might still be around, but I can guarantee that they will need to look much different than what they do today.
*Willie Krause is senior manager for process innovation at IQ Business.
