In a world where it’s possible to start a bank for under twenty million dollars, it would be tempting to think that incumbent financial institutions are under pressure. But it's not all bad news, in fact, the sector just might make it, provided it plays its cards right.
Make no mistake, the threat to the banking sector is real. However, Kristin Moyer, research vice president at Gartner, reckons the industry will survive these challenging times.
With hundreds of start-ups in the sector looking at disrupting everything from payments systems to financial advice, the cosy oligopoly of banks, especially in Australia, is on borrowed time.
According to Moyer, the barriers to entry have slowly but surely dissipated and that process is only set to accelerate.
“This year alone somewhere between three and four billion dollars will be spent on fintech companies. Anyone can build a bank,” Moyer told those gathered at Gartner's Gold Coast symposium last week
Unsurprisingly, much of the threat to the banking sector has been of the industry’s own making with Moyer pointing out the sector has been overcharging and under delivering on their services for decades.
“We can do better,” she says. “What non-banks have been doing is finding open door in the industry and changing the rules of the game in doing that.”
Like many industries, much of the technology investment in banking has been focused on reducing costs and headcount. Now innovation has to focus on delivering services to customers who are changing their financial behaviour due to new technology.
Three key disruptors
Moyer sees the three key disruptions to the sector being cloud computing, social media and APIs. Of the three, cloud computing has been the most profound; “cloud and mobile together are one of the big reasons why you can build bank with twenty million dollars in about six months.”
At the edge of the banking industry, these ease of access is resulting in falling margins; something that many other sectors have long being struggling with for decades but a phenomenon relatively new to financiers.
Like the telco industry where regulations and high capital costs have protected incumbents, the banking industry has been immune to the changes affecting more competitive sectors but now start-ups are changing the rules of the game.
Revolving around the customer
“We believe that non-banks are changing the game with digital models,” says Moyer. “We need to reinvent what digital banking is. Right now the non-banks are doing it for the industry but banks can do it better.”
Moyer suggests there are three key areas that banks need to pay attention to as they adapt to a more innovative marketplace and reinvent retail banking for a digital age; the changing technologies that customers are using, the rise of open ecosystems and removing friction for the user.
For banks, that friction in customer and business transactions has been a source of lucrative fees in the past but now Moyer believes the market is demanding a more seamless experience as services like AliPay, PayPal and other services make transactions easier; “a big change that we need to make is to make banking not just easier but to deliver it so it revolves around their digital life.”
“Most of the way banking operates today is as a separate activity that customers have to do. What non-banks are doing well is delivering banking in a way that revolves more seamlessly around the customer’s life,” Moyer says.
One of the start-ups that Moyer cites as meeting needs and removing friction for consumers is Australian payment service Pygg that enables peer-to-peer payments for schools and community groups.
“One of the market segments they are targeting is between parents and schools, that’s a real narrow market segment that’s a needs based solution.”
While start-ups are nibbling at the edges of the banking industry, the incumbents are not standing still with Moyen citing initiative like Spanish bank BBVA’s API Hour, an event run in 2013 to engage start-ups and discover new talent.
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Despite the disruption fintech startups are inflicting on the banks, Moyer doesn’t see them as being overly successful; “we believe that by 2016 that seventy-five per-cent of current non banks will fail.”
“Right now there’s some really high valuations of fintech companies that are out there, investors expect a return and if they’re not getting that return then the money stops flowing.”
Moyen specifically highlights the dilemma of the high profile payments provider Square which is currently valued at over six billion dollars in a marketplace that’s extremely competitive.
Overall Moyen sees the incumbent banks being in a strong position as they transition to the changed marketplace, “regulation makes the cost of true disruption high. It costs a lot to innovate so instead of looking at how to disrupt ourselves as an industry we need to innovate around the edges.”
Reinventing the institutions
“To reinvent banking what you really need to be doing is looking at the quality of your services and the quality of your data stack because digital shines a really bright light on these things.”
Moyen’s message is the banks have a lot of fight in them yet and while they are not immune from being disrupted a combination of regulation and size makes it hard for startups to truly change the industry in the ways other sectors have being radically changed.
While that view is good for banks and their shareholders, it certainly isn’t a message that the giants of the financial sector should rest on their laurels.
The challenge for bank executives is to reinvent their institutions to meet the rules of a changed game.