November 27, 2015
The banking world is going through a chain of developments, and from the outside it appears to be like a controlled nuclear fission reaction. New startups are using cloud, mobility, analytics, content, algorithms and machine-learning tools to challenge banks and FinTech. They are leaving no stones unturned.
Evolving trends highlight the increasing number of startups, new innovative solutions, consolidation through acquisitions and changing customer expectations. Internet banking has emerged as the biggest focus area in the digital transformation agenda of banks.
In a speech in London, Antony Jenkins, the former CEO of Barclays, said, "The incumbents risk becoming merely capital-providing utilities that operate in a highly regulated, less-profitable environment – a situation unlikely to be tolerated by shareholders."
Jenkins says a series of Uber-style disruptions in the industry could shrink headcount at traditional big banks by as much as 50% while profitability in some areas could collapse by over 60%; this is really an important prediction by a renowned personality who had already run one of Britain's biggest banks. It can also be taken as a warning for traditional banks.
As we have already seen, many new FinTech startups have proved themselves to be disruptive and competitive for traditional financial institutions like banks.
Here is a list of trends we have observed in the sector:
Digital Banking vs. Traditional Branch Banking
About 35% of banks’ market share in North America could be up for grabs by 2020 as traditional branch banking gives way to digital banking and as new competition emerges, according to new research published by Accenture.
Jenkins says, We will see massive pressure on incumbent banks which will struggle to implement new technologies at the same pace as their new rivals. That will make it increasingly challenging for them to deliver the returns and profitability that their shareholders demand.
Ultimately, those forces will compel large banks to significantly automate their business. I predict that the number of branches and people employed in the financial services sector may decline by as much as 50% over the next 10 years, and even in a less harsh scenario, I expect a decline of at least 20%.
His prediction seems to come true. The Q2 2015 financial earnings report by the top four banks in the US have brought to light some interesting results on the number of branches and mobile banking usage. In Q4 2014, Brian Moynihan, CEO of Bank of America, had said, 9% of all checks deposited by customers in the fourth quarter came from snapping pictures on smartphones or tablet computers. This figure didn’t even exist in 2012. This implies the shift to digital banking initiated by Bank of America and its customers. Over the past three years, Bank of America has been cutting down the number of branches. In 2013, the total number of branches declined by 189. In the past one year, the giant further trimmed the number of branches by 234 (4.6% decrease). As evident in Figure 1, the number of branches Bank of America had in Q2 2014 was 5023 and the number of branches it had in Q2 2015 was 4789. The same graph indicates the rise in mobile banking customers as reported in the bank’s quarterly financial statements. In the past one year, mobile banking customers at Bank of America increased by 13.5%. This shows the significant acceptance of digital banking by customers and the bank.
Lloyds Banking Group: Up to 1,000 job losses are expected to be announced at Lloyds Banking Group as part of its digitally-focused restructure.
The roughly 1,000 cuts will form part of an overall target of 9,000 announced last October as the precursor to a new three-year strategy aimed at reflecting the increasingly digital consumption of banking services.
Lloyds is investing £1.6 billion into digital services and increased automation under this strategy which will last until the end of 2017.
Barclays: In 10 years, Barclays would see between 26,000 and 66,000 job cuts worldwide, and 280-700 branches shut in Britain.
3. The FinTech Tsunami Is Coming
Nonbank market players in the financial services industry are already disrupting the cross-border money transfer industry in the US with a variety of innovative solutions which make traditional players obsolete. The same trend can be observed now in another innovation hub – the UK, where the top 20 nonbank money transfer providers account for over £40 billion of foreign exchange per year, saving customers over £900 million annually, based on FXcompared’s estimates.
TransferWise, a UK-based startup, lets users move over ~ $778 M all over the world with the help of its platform. Until now, the company has taken more than 2% of the London global remittance market over a period of four years since its launch. Banks charge high fees for sending money internationally but with TransferWise, anyone can send more money at fair rates.
It is not only the nonbank service providers shrinking the space for banks in remittance. The traditional lending industry has been hit the worst by new startups since there was a lot of scope for improvement within the industry. Alternative financing FinTech startups launched products that not only helped borrowers but also helped in lowering operating costs through the use of technology. This model fits borrowers who want quick access to cash at good interest rates.
Lending Club is a good example in this sector. Lending Club, the world’s largest online marketplace connecting borrowers and investors, announced financial results for the third quarter of 2015 (which ended on September 30) and reported a net income of $950,000 for the first time after its IPO in December 2014. It originated more than $2.2 billion in loans this quarter, which is the highest of all quarters to date.
Talking about a FinTech in the mobile banking space, Atom Bank – a UK mobile banking startup and app – is doing a splendid job.
Atom is a startup bank which has not been launched yet but recently authorized by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the PRA. Founded over a year ago and based in the City of Durham, Atom is working with partners to bring pioneering technology to Europe for the first time. Atom is building the UK’s first bank designed specifically for the digital realm, offering easy and convenient banking along with unique and engaging ways to manage money.
Recently, Spanish bank BBVA led the £82-million funding round for Atom Bank with £45 million in investment for a 29.5% stake in Atom. Among other investors were previous backers Woodford and Toscafund as well as Marathon and Polar Capital. Atom raised £135 million to date in an 18-month course and is looking to launch to the public in the beginning of 2016.
It’s a pretty big deal in the UK where incumbent banks have been slow to adopt the mobile and digital channels. Atom bank has plans to develop products and services that can be delivered through mobile apps and online. So think of it as a virtual bank like Moven or Simple in the US, which we all know is a powerful banking concept.
It is time traditional banks take charge and embrace technology to move with the wave. Otherwise, there is a huge chance that FinTech will make all the predictions come true.