Death of banks?

Written by: Len Williams Posted: 09/12/2021

BL75_death of banks illoTechnology’s rise, combined with the introduction of Open Banking, has incentivised tech players to enter the banking sector. But does the rise of the flexible fintechs sound the death knell for traditional banks?

Here’s a thought to strike fear into the heart of any banking executive. Imagine one of the world’s biggest technology companies creating its own financial services app.

This tech behemoth can channel unlimited resources into building its own payment infrastructure – while offering loans, insurance and investment products, just like any bank.

And, thanks to its size and ubiquity, the company aims to become millions of consumers’ primary provider of financial services. 

This isn’t a prediction of what Google, Amazon or Apple might one day do. It’s already happened. China’s AliPay, a spin-off from Alibaba’s ecommerce site, is set up and has more than 1.3 billion customers.

And they’re not the only consumers shirking traditional banks today. Hundreds of millions of people now rely on fintech – financial technology – apps similar to AliPay for the majority of their needs, and some are even able to live without a traditional bank altogether. 

Although AliPay has recently been reined in by China’s regulators, it offers a striking example of how fintech firms are playing traditional banks at their own game. 

Enabled by internet connections and mobile apps, fintechs are offering consumers easy-to-use apps to do things that were once the exclusive domain of banks. Critically, they’re undercutting banks in areas where the incumbents used to make significant profits.  

So, will technology spell the death of traditional banks? 

Over the past decade or so, a plethora of fintech firms have emerged that offer various banking services without necessarily having banking licences themselves. Electronic money institutions such as Revolut provide debit cards, accounts and swish mobile apps; firms including Wise offer cheap foreign exchange; and Iwoca lends people money.   

“The fintech industry is a significant challenge to the business-as-usual approach from the traditional banks” says James Watkins, Lecturer at the University of Law Business School in London. 

Growth of fintech

Watkins argues two key factors contributed to the growth of fintech. First was the 2008 financial crisis. This led many people to question if there might be a better model to what high-street banks were offering. 

Second was a paper by the ‘founder’ of Bitcoin, the mysterious Satoshi Nakamoto. Published in 2008, it was a sort of manifesto for an alternative digital monetary system that would bypass traditional banks’ plumbing. Nakamoto’s idea inspired the launch of cryptocurrencies. 

Regulation contributed, too. In 2015, the European Parliament updated its payment services directive to encourage new entrants into the financial services sector. Known as Open Banking, it compelled traditional banks to give licensed start-ups access to customer data. 

Fintech firms could now benefit from the troves of information that banks had stored up for decades, and offer apps and services built around it. 

Open Banking means that, as consumers, we can now allow fintech firms to view your transaction history, accounts and other personal data. They, in turn, can then help us do more with our money – from suggesting a credit card with a better rate, to switching money to a savings account where we’d earn more interest. 

This regulatory change has been transformative and is only set to continue. Nick Maynard, Head of Research at Juniper Research, says: “The value of global payment transactions facilitated by Open Banking will exceed $116bn in 2026, from just under $4bn in 2021.”

Of course, fintechs have also benefited from new IT. Rather than being bogged down with ancient mainframes, they can now use the most modern tech to offer a superior customer experience. 

Today, fintech firms are muscling into almost every part of the financial services industry. No longer content to offer just FX or mobile banking, they’re providing ISAs, personal pensions, trading tools, insurance, payments infrastructure and practically everything else that banks offer.  

It’s often said that people’s relationships with their banks last longer than their marriages. In the UK, people use the same current account for around 17 years, on average, while marriages that end in divorce typically last 12 and a half. 

BL75_death of banks illo2So, despite all the hype around fintech, the notion that people are suddenly about to abandon banks they’ve been using for decades may be a little far-fetched. 

As Maynard points out: “The banking relationship is highly important to users and has been very difficult to break, with the UK seeing a very slow rate of account switching… despite many different measures taken to boost competition.” 

Part of this is inertia. Despite the bells and whistles of fintech, many people lack the knowledge or inclination to make use of these new-fangled technologies. 

There’s also the sense of security that comes from using a traditional bank or building society. Customers know their money is protected and secure. 

While shocks like the 2008 crisis dented trust, people are more confident depositing their savings with a well-known high-street bank than with a jazzily named start-up. The fact that several young fintechs, including most recently Germany’s Wirecard, have folded amid allegations of scandal has also diminished the glow around these firms. 

Of course, many fintechs don’t see themselves as banks and don’t want to be. Many of a bank’s core services, such as lending money, offering mortgages and foreign exchange, are highly regulated and onerous. Few start-ups have the capital or the desire to compete around these core banking services, and perhaps never will.  

Another reason to doubt that tech will kill banks is that many incumbents have taken note of the arrival of fintech and the competition has pushed them to offer similar services. 

Gordon Irish, Head of Private Client Acquisition at Investec in Guernsey, says his organisation has a mobile app that does many of the same things as a fintech app. The interface lets customers view their balances in multiple currencies and accounts, as well as more “humdrum” functions, such as filling in application forms, he explains. 

In fact, most incumbent banks now offer an app of this kind, which looks and feels comparable to offerings from fintechs such as Monzo or Starling.

Differentiating points

Traditional banks are using IT to differentiate themselves in other ways, too. Oswald Lopes, Head of Operations and Delivery at InfrasoftTech, which helps finance businesses digitally transform, describes various projects the company has worked on in the Channel Islands.
In collaboration with Jersey Finance, for instance, the firm is involved in a trial of ‘virtual humanoids’. When customers couldn’t visit banks in person during the pandemic, they were still able to visit webpages where they’d be welcomed by a digital customer service manager. 

Lopes also says many banks are using tech to become more efficient. InfrasoftTech helps banks use robotic process automation – a kind of artificial intelligence – to speed up areas such as onboarding new customers. 

By using these technologies, the services offered by traditional banks will feel competitive with what fintechs are now providing. 

Finally, there’s the human side to banking, which fintechs will struggle to replicate. Gordon Irish says that for day-to-day tasks, customers of private banks are more than happy to use an app. But “people come to private banks as they can offer a personalised solution to problems”, he says. 

Rather than leaving people to deal with computer systems alone, relationship banking allows the bank manager to assess the customer’s needs, come up with solutions and solve problems creatively. 

If fintech isn’t necessarily killing traditional banking operations, it is affecting how they operate. 

As Maynard concludes: “We will see a continued push by fintechs and new entrants to gain share, but traditional banks will also continue to operate, seeking to improve the user experience to maintain their market position.”

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