New digital platforms present a threat to conventional banks — but there are several factors that mean they aren't going anywhere in a hurry. Here's why the future of banking looks more like the past than you might think.
Picture: Getty Images/Hulton Archive
At Gartner Symposium ITxpo/2014 on the Gold Coast today, Gartner analyst Kristin Moyer presented a session entitled "Anyone can build a bank". The central theme of the presentation? With financial technology startups able to set up "bank-like" entities with as little as $20 million and with just six months work, the sector is ripe for disruption. ($20 million is a lot of money for you or me, but it's essentially loose change for a traditional bank.)
Given that the audience comprised banking IT execs, Moyer didn't particularly highlight one of the reasons why banking is ripe for disruption: because so many banks are profit-driven behemoths for whom customer service is entirely an afterthought and massive fees are the name of the game.
However, she did make that point, if rather more gently than I would. "If we are really honest with ourselves, as an industry, we've been overcharging and under-delivering for a while. We can do better."
The attitude that banking in its current form will continue because it has always been there was a dangerous one, Moyer pointed out. "We do not want to have a Kodak moment. The time is now to really be reinventing our business." In areas such as peer-to-peer payments and lending, or easy transfer of money between countries, conventional banks lag well behind online disruptors.
With that said, however, it's evident that there are two factors working in favour of big banks over smaller and more specialised finance upstarts, no matter how appealing or customer-friendly their product.
Firstly, there's the fact that core banking services are highly regulated, in a way that makes it difficult for new startups to muscle in. Those regulations are typically national, which makes scaling out globally — the preferred approach for most digital startups — more difficult.
"The way that non-banks are changing the rules of the game is by innovating around the edge," Moyer noted. That makes it easier to meet specific needs, but it's also hard to avoid given the highly regulated nature of the industry.
That said, regulation causes difficulties for the existing players too. "Regulation makes the cost of true disruption high," Moyer said. "It costs a lot for us to really innovate."
The second problem for disruptors is the brutal reality that many disruptor financial services are themselves on a shaky financial footing, relying on relatively small "clip the ticket" payments that will only provide profits if they're executed on a massive scale. "Non-banks are changing the rules with digitalisation, but there are few non-banks that have sustainable financial models."
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Just how big is that risk? Gartner predicts that by 2016, 75 per cent of current non-bank finance providers will either go out of business or be acquired for significantly less than their current book value. Current valuations aren't sustainable without more obviously profitable business models, Moyer said.
Conventional players and startups both also have to grapple with the potential risks of a platform outage. "They're no more immune to technical glitches than we are," Moyer said.
If we're lucky, banks will take the competitive threats seriously and start rethinking their approach. "New ecosystems are absolutely vital to becoming a digital bank of the future," Moyer said. But if those startup organisations do largely fail by 2016, it seems reasonable to assume that banks won't be in such a hurry to improve their services.