Digital Disruption and the Challenge to the Banking System …
This week the Competition Market Authority [CMA] released the final report on the UK Banking System. Despite fears about digital disruption and the potential “uberization” of the bank network, change is slow to take effect.
The report concludes the smaller, newer, “challenger” banks find it difficult to grow. Older, larger, legacy banks do not have to compete “hard enough” for customers’ business.
Switching, the process by which customers change bank accounts from one bank to another is still extremely low. Switching accounts for between 3% and 4% of total current account business.
The CMA would like to see the dominance of the Big Four, HSBC, Barclays, Lloyds and RBS diminished. In 2014 it is estimated the big four, plus Santander, have a combined UK current accounts market share of 85%. Add in TSB, Nationwide and the Co-operative Bank and the total increases to 97%.
For the new challenger banks like OakNorth, Aldermore, Starling, Monzo and Atom the challenge is particularly difficult. Despite a strong Fintech mobile platform, Monzo, Starling, Atom and Tandem will struggle to recreate, in banking, the success of AirBnB and Uber in hotels and transportation.
Scaleability is a difficult growth challenge when confronted with customer inertia. In banking, far more is at risk than calling a cab or booking a room. The commitment Life Time Value [LTV] has much more at stake as clients put their savings, houses and transactions on the line.
Customer inertia, with a switching rate sub 4% will inhibit the growth of challengers whether digital or not. The marketing spend and capital requirements to achieve critical mass, are significant impediments to rapid growth.
So what can the CMA achieve ...?
The CMA would like to develop an “Open Banking” network. A world in which customers are able to move accounts more easily and more regularly. Price and performance comparisons should feature as part of the banks’ marketing profiles.
APIs would be linked to all major banking systems. Clients would receive reliable, personalised, financial advice, precisely tailored to individual circumstances delivers securely and confidentially.
Big data and predictive analytics would enable cash forecasting to warn of impending overspending. The standards set by the Empires of the Cloud, Google, Apple, Facebook and Amazon are becoming the norm for the banking network.
“People who bought this also bought this, but you can’t afford it - so don’t look at that site again!”
With Open Banking, apps could use transaction information to find the current account deals which suit best. Running a small business, apps could find the best options for business accounts and loans. Apps could even help avoid overdraft charges by moving cash into accounts when they dip into the red.
Unfortunately the CMA fails to explain where the cash would come from. It’s all based on the wonderful world of fantasy banking. A world in which businesses and individuals never get into financial trouble. A world in which cash is always available at a tap of a button. Maybe soon, there will be an app for that. The “Money-App-tree” may be on the digital horizon but not just yet.
More choice, more competition, greater market fragmentation, greater product innovation, disaggregation, right sizing the banks. It all sounds so easy. Monzo is about giving customers the data and insights into their spending and saving with warnings of overspend and shortage. But is that really a sufficient point of differentiation? Predictive capacity may be a wake up call for the legacy banks but not much more. Big progress is already being made by the big four and others in the world of relationship banking. Banks are adapting. Capital One Bank acquired UX design agency “Adaptive Path” and the App - Level Money to push ahead in the digital space.
How the Big Banks will respond ... ?
The legacy banks have size and experience on their side. They have big balance sheets and big networks plus experience with the regulators, retaining the confidence of investors and clients. They have established relationships, data history, data availability, a spread of products, services, risk management analysis and the scale of operations to sustain large market shares.
They do have legacy software systems and architecture which are demanding huge investment to make the move to digital and mobile. They are responding by developing startup or VC programmes with FIntech companies, partnering or acquiring Fintechs or developing resource in house.
Santander’s Innovation, Barclays Pingit App and Accelerator schemes, Lloyds Digital Champions, Citibank’s Digital Mobile Challenge and Digital Acceleration teams are witness to the response to the challenge.
Fintechs will struggle to gain critical mass. The legacy banks will react by collaborating, competing or acquiring either totally or by partial investment. Doing nothing is not an option.
Empires of the Cloud …
The Empires of the Cloud, Google, Apple, Facebook and Amazon are defining the standards for digital UX user experience and UJ user journey. Millennium clients are expecting the same standards of service and response from banking platforms as they are from Amazon and others.
Payment offers easy pickings as a challenge to the banking network. It is the most vulnerable to digital disruption. 2015 was the year of successful IPOs from PayPal, Square and WorldPay. The success of Paypal and Transferwise have determined the standards for ease and speed of money transfers both nationally and internationally. New players like Transferwise may grab the headlines but Western Union will remain the dominant player in the international payment market.
Visa and MasterCard remain strong players in the transaction market. “Contactless” is a great step forward in the digital age. Google, Apple, Facebook and Amazon all have payment options with “Wallet” (differential card payment options) as an enhancement. Facebook paid $19 billion for WhatsApp as an addition to the social media network. The pattern of payment via messaging options have been set by WeChat in China. Payment and messages are able to use the same platform among Facebook’s 1.7 billion users worldwide.
Empires of the Cloud will be the main threat to the banking system rather than the newer, smaller Fintechs. Apple, Google, Facebook, Amazon have the relationships and the platforms to disrupt the conventional banking network. Once the banks are obliged to access with APIs then the disruption is eased significantly.
Will we see the Bank of GAFA in the years ahead? An interesting thought when one considers the combined capitalisation of the Empires of the Cloud is $2.5 trillion dollars. RBS, Barclays and Lloyds, each would represent a modest premium to a WhatsApp deal based on current valuations.
Imagine if the Empires strike back, what would the CMA make of that!
Happy (Digital) Strategies,