Editor’s note: This article was first published in November 2015. The forecasts and figures it cites are from 2015, including staff cuts of up to 50% and profit falls of up to 60% in the next 10 years, Funding Circle valued at over $1 billion, and the Telegraph survey. Yomvi has since been rebranded.
Given what we’ve said before about the tech giants, and how some huge industries have seen their businesses hurt by them, banking will be no exception. And that will happen sooner rather than later. In fact, it’s already happening.
We saw how the music industry clung to its old business model until it finally decided to accept working with new tech services, which, even though they have cut its profit margins, will at least let it keep making a profit. It happened with film, opening the door to services such as Yomvi (the streaming service of Spain’s Canal+) and Netflix. And it’s happening to the taxi sector (Uber, Cabify…).
Now Antony Jenkins, former chief executive of Barclays, says the banking business will be the next to be hit by financial technology companies; in other words, banks will face their own “Uber”.
Jenkins predicts that the workforce of the big traditional banks will shrink by as much as 50% over the next 10 years, while bank profitability could fall by as much as 60%, because of “a lack of courage and determination to win in this new terrain that lies ahead”.
Banking executives tend to be conservative, yet we now live in a world of constant change, where the winner is not whoever has the most “established” business, but whoever responds fastest to change and knows how to adapt to new times.
According to Jenkins, there is a big wave of companies with top technology experts who can do things better, faster and cheaper, to the point of disrupting the banks’ core businesses: lending, payments and wealth management.
But Jenkins isn’t the only one who thinks this. According to a survey, 27% of banking executives see new tech companies as a threat to their business. That’s why, perhaps, if banks can’t invest quickly in certain technologies, investors will rush out of the banking sector.
The new players in what is banking’s business today
As we’ve said in previous articles, we will see more advances in the next 10 or 20 years than in the last 200, and right now there are companies perfectly positioned to dominate any sector, among them Google and Apple. It wouldn’t be surprising if one day you kept your money in “Google Bank”, something Jeff Jarvis was already talking about in his book What Would Google Do?.
There will come a time when physical cash disappears (it won’t be needed) as mobile payments advance; in the near future, they will be our wallet.
PayPal already finances new businesses where banks won’t grant credit. It’s an innovative service already available in the United States: PayPal itself gives you a loan so you can start selling in your online store, and each month it deducts a percentage of your sales to repay it.
But it isn’t the only company playing to win the lending business. There are others such as Lending Club and Funding Circle, a company that lends money to both individuals and businesses and has already been valued at more than $1 billion. Its lending service is fast and cheap.
Other companies, such as Nutmeg, manage people’s wealth at low cost, while other startups are competing for payments and international payments.
The consulting firm McKinsey also thinks that technology will wipe out at least two-thirds of the profits banks make on retail lending, car loans and credit cards, because banks simply won’t be able to compete with some of these tech companies.
But all is not lost yet
Banks still have the chance to focus on their customers’ needs rather than on “extracting money from their customers’ pockets”.
According to Jenkins, bankers will have to address some important questions. First, they will have to accept that we live in a discontinuous world. Executives will have to take significant but calculated risks, to work on projects nobody else is working on.
As in every other sector, the first to wake up tend to fare better. Second, there doesn’t have to be a technology strategy in order to survive. Perhaps a strategy with technology at its core is enough. That’s a big difference, according to Jenkins.
Finally, bankers will have to think differently. “In my experience, people tend to become risk-averse when times of change come, but carrying on doing what they’re doing is the riskiest thing they can do,” says Jenkins.
So… will banks be smart and fast enough to get through this wave of change? And, more importantly, will banks be a profitable long-term investment, or should we invest in the new tech companies that promise to take over the banking business?
See also: If Google went into the restaurant business, what would its restaurants be like?
Featured image: Acabashi, CC BY-SA 4.0, via Wikimedia Commons.
