There will be no Uber of banking

As much as some people live in hope that a startup might one day take over the banking world, it’s not likely to happen. But that doesn’t mean change isn’t afoot

There’s an ounce of social justice to the idea of disruption in the banking world. The sector is maligned as the most amoral (next to journalism), and there’s a hope that the incumbents will ‘get what they deserve’ and be overthrown by rosy-cheeked startups. 

Given what’s happened in the past 10 years, this attitude is perhaps unsurprising – but unlike the worlds of taxicabs and hospitality, the possibility of a complete newcomer taking over global banking in a matter of years was always going to be nothing more than a pipe dream.

The history of banking is one of slow evolution, not radical change. The green screens and paper spreadsheets of the 70s graduated to PCs and email. Today we’re at the tail end of the reaction to internet banking, where most banks have generic digital offerings, and some have sophisticated CMD (customer management databases) for client care. Given time to do so, banks have managed to keep up. 

Of course, technology moves fast today and, in certain industries, those who’ve failed to keep up have been left behind. The Uber parable tells the story best. Founder Travis Kalanick found the sweet spot between technology and customers, and in doing so devastated taxi ranks around the world. 

For at least a decade, banks have been like the old-fashioned taxi ranks. Post-financial crisis, and with heavyweight tech companies like Google and Apple breathing down their neck, they look like old dragons – gorged with gold, ripe for slaying. So while there may be no Uber of banking, should the banks be concerned about threats to their stranglehold?

Too big to fail

To talk about disruption in banking has echoes of a conversation started 20 years ago. There was once confident talk that the banks were on the way out. Startup bank Egg, which lasted less than a decade after being founded in 1998, rose quickly and fell just as quickly.

It was thought at the time it would be the one to disrupt the long-vilified banking sector. Evidently it didn’t. Instead of disrupting banks, Egg just replicated their services online, and when it failed, was divvied up among them. 

Using Egg as an example could seem like extrapolating. However, looking at the four challenger banks listed in a 2016 Tech World article – Atom, Mondo, Starling and Tandem (all UK-based) – none offers a new service, and only two have a banking licence, so the other two can’t even legally call themselves banks. 

To some, the idea that innovation in banking hasn’t thrived is unsurprising. Mark Loane, CEO of C5 Alliance, understands the stark contrast between the interests of taxi customers and those of banks. 

"Customers don’t care what taxi they use – they go for whatever will get them there fastest. These days that’s Uber and its competitors who provide taxis quicker. On the other hand, challenger banks can only really offer a nicer online interface. They’re asking you to put your savings into them – it’s not going to happen, frankly." 

The number one asset that large banks have against small ones isn’t money, but trust – which is slightly ironic considering the events of the financial crisis.
 
Loane takes the view of most banking customers today. "I’m a technology-first person, but I put my money in an old investment bank. They have equity to support it and they’re large, so shouldn’t fail and disappear with my money, despite having a rubbish internet offering." 

Trust blocks off a huge part of the market. Customers make their choices on personal testimonies and a recorded history of safe, transparent banking, and technology can’t recreate these – forgoing a time machine. To customers, challenger banks look risky. And aside from this, there are the practicalities – running a bank isn’t cheap or easy by any means. 

"Trust is one barrier: the cost of capital and regulation are another, which make it hard to earn any money," says Amit Taylor, Group Managing Director of Trust Corporation International. 

He also believes the banking system is so deeply embedded that any new operator would have to work with the established banks, pointing to "the way the online payments system works, which is largely through the hands of incumbents". 

Ones to watch

So while there’s no risk of the banks being driven out of business any time soon, it doesn’t mean there aren’t corners of the financial services world that aren’t seeing new operators (and technologies) making their mark. Payment solutions is one of the most rapidly advancing areas. 

The payment solutions space has been positively polluted with startups. All of them claim to make payments faster, easier, and even cheaper – but their main advantage is they are cashless. Incumbent banks can’t even get a foot in the door. 

But what’s perhaps most interesting is that companies with pre-existing customer bases, such as Apple and Google – with ApplePay and Google Wallet – are providing payment solutions, incorporating mostly generic concepts into already popular products such as the iPhone. 

And while the concept of paying via gadgets isn’t itself novel, the entry of large tech companies is. Unlike most challenger banks, they have already established trust – who hasn’t used Google, or heard of Apple? So the greatest barrier to entry doesn’t apply. 

However, although they nip at the peripheries, new innovations in themselves can’t displace a bank. There’s still too much they offer. Yet it’s surprising that when surrounded by so much innovation in fintech, banks aren’t more responsive. Don’t they recognise their vulnerability? 

"Some banks simply have their heads in the sand with the respect to potential disrupters," says Taylor. "Then, on the other side of the spectrum, you’ve got Goldman Sachs, which is at the forefront of fintech and is a big bank. In my view, since 2008, most banks haven’t been focused on innovation, but on the challenge of diminishing margins." 

Taylor’s citing of Goldman Sachs is an interesting case in point. Along with a number of other banks – such as Citigroup, Barclays, Morgan Stanley and Wells Fargo – it is an active investor in companies and incubators, such as mobile payment newcomer Square. Unlike its counterparts, it has also made fintech acquisitions, including digital retirement savings platform Honest Dollar and securities trading platform Pantor.

All the same, like any acquisitive company, it’s often cheaper to buy a startup than put in the R&D time yourself – and you can also shut down any potential threats in the process.

Mark Loane believes a time will come when banks and fintech meet in the middle, rather than a sudden usurper taking over. Fintech adviser and investor Geoff Miller describes it vividly as "death by 1,000 cuts". 

"It’s not going to happen quickly," he says. "There’s a window of opportunity to innovate. Banks are setting up innovation budgets now and looking to collaborate to avoid the disruption that fintech implies. Their strength, brand, sticky client base and services will keep them competitive."