13 Reasons why Banks will be around a lot longer than the experts predict or why Resilient Banks beats Fintech Smarts (almost) every time….
‘Experts’ who forecast the Death of Banking with the same conviction that Fundamentalists predict the Apocalypse, are very much mistaken.
There are at least Thirteen Reasons Why* this won’t happen that I can think of off the top of my head (though there are probably many more). So here goes…
First – Payments is not the same as banking. Almost all such arguments that banks are failing customers appear rooted in the observation that some customers (ie. millennials*) either don’t like dealing with, or don’t think their banks doing enough to keep them happy.
While there may be some truth in this, the way we experience Banking is usually through our cards, accounts, ‘wallets’ or devices . Like the mobile phones we use to pay for stuff, and conduct our finances. One can see why some folks could confuse confuse the two. But conflating the two is anothr matter entirely. To think that Payments and Banking are the same and concluding that customer demand for convenient ‘payment’ methods, and ‘Banks’ apparent slowness to respond, is somehow ‘evidence’ of a failure that will eventually result in the Death or Disappearance of Banks or Banking, or their diminution to their role to that of beggars, is at best wishful.
The actual ‘Business of Banking’ and what banking actually entails (as opposed to what people think it entails), is much more than just ‘cards, payments and wallets’. This is based on a very narrow understanding of what Banks actually do.
Resilient Banks & Fintech Smarts
Second – Most FinTechs and Startups operating in the OPM* space work in discrete, relatively narrow parts of the value chain. This is also where the costs are low and the risks almost non-existent; and the law allows. While its easy to describe them as ‘Banks’ or ‘Neo-Banks’ they are not actually banks. They are, for the most part, payment companies that combine really smart technology, excellent UI/UX, and smart market insights, to enable payments (or adjacent payment-like services) for their (mostly) millennial customers. Quite a few of them (the so-called Digital-Only banks), like Starling Bank and Monzo provide card-based ‘convenience’ payment options to their customers.
Third – The ‘Death of Banking’ narrative is derived from a powerful image of ‘Silicon Valley’ in popular culture; namely a bunch of super-smart, rocket-scientists who can do what they want, and win every time. The narrative goes something like “If Silicon valley can create an Uber or Airbnb, imagine what they can do if they turn their attention to Banks”. (Usually with the sub-text that banks deserve what’s coming).
Banks own worst enemy?
A very profitable cottage industry of Consultants, Advisors and Experts, are cashing in on the “Death of Banking” narrative. These experts predict (with more than a little schadenfreude), the imminent ‘Death of Banks’. This is a hypothetical day, in the not-too-distant future when banks finally face their collective ‘Uber‘ moment when they either disappear into the dustbin of history or are reduced to (metaphorical) beggars at the feet of an all-powerful Silicon Valley or array of ‘FinTech’s’.
While its an understandable sentiment given that that banks, in general, can be their own worst enemy at times, the notion that ‘Big Tech’ & ‘Silicon Valley’ FANG’s are just biding their time, waiting to strike and destroy Banking as we know it, is at odds with the reality.
It appears to be based in an oft-repeated statement that ‘Big Tech’s’ overwhelming command of their customers time and attention – as well as their impressive cash earnings, stellar market valuations, and enormous customer base – is enough to take on Banks at their own game…and win. It is just plain wrong to automatically assume that assets, when used smartly, can be used to somehow vaporise the banking industry, or at least reduce banks to beggars. This is a canard, and does not bear up to scrutiny, because the real world is a lot more complex than what we think.
300lb toddler with a razor?
Fourth – In the real world, FANG’s, FinTech’s, startups and other Silicon Valley hopefuls operate in a highly volatile, fickle and transient world that is very different to banking. The likes of Google, Apple, Facebook etc etc (with their massive customer bases), are often tipped as the biggest threat to banks. They are mostly either Media, Advertising, Tech or Content Consumption-led enterprises. Their track record, translating initial successes into areas outside of their core business is not good. Simply because they are good at one thing does not automatically make them good at another*.
Fifth – Time and tide has finally caught up with Big Tech. It’s fair to say that in the last 18 months, the myth of the Silicon giant is starting to wane, mostly because of the way they have treated their obligations to national laws, data, information, privacy, tax or governance, with varying degrees of contempt (Hint: Silicon Valley as an industry has not exactly covered themselves in glory). Facebook is under a lot of pressure to behave more like a grown-up, in a grown-ups world, and less like an entitled brat.
Just another bank?
My guess is that the free ride Silicon Valley has enjoyed for the past two decades is slowly coming to an end. The Regulatory vacuum into which they stepped in the early part of this century is now starting to fill up. Regulators are increasingly sceptical of the way that the Silicon Valley Unicorns and giants have conducted themselves.
It looks increasingly likely that such companies will find themselves hemmed in by National and regional Regulators (like the EU) that compels them to focus on their core business, and behave in ways that will likely limit or impede their ability to keep the rivers of cash flowing, as they once did.
Which means any serious foray into banking and financial services by Silicon Valley giants in such a climate will likely receive a frosty reception from Regulators and the public, who are wary of their cavalier disregard for people, their greed and oft-times blatant dishonesty and disregard for rules and laws – not a good look when you want to handle OPM* (like a Bank). This is not say that any one of those companies won’t acquire a bank or a banking license at some point in the future, but that means they become just another bank.
‘Death by a thousand cuts’
Sixth – smaller FinTech’s and startups have their own Achilles heel namely their balance sheet – which aside from anything else, is also a measure of a company’s financial resilience; its ability to weather the vagaries of commercial life over time; and the control they have over their own destiny. Announcing a $2Bn valuation is just not the same thing as a bank having $2Bn on deposit, for so many, many reasons (Resilient Banks & Fintech Smarts)
Seventh – Venture capitalists and Markets make for fickle masters. When new multi-billion dollar investments are announced in a new Fintech or startup with great fanfare, it is often just that: an announcement. Chasing customer loyalty, can be a very elusive and transient asset – as any number of failed Tech companies have discovered, in a world of almost endless, free choice and options.
Eighth – ‘Death by a thousand cuts’ is often bandied about to describe how Banks will slowly lose their edge over time. Consultants and experts all too eagerly trot out the same story, to anyone who cares to listen, about just how weak and vulnerable banks and banking is, and just how awful banks are at getting things done. While these pundits are probably right, and what they say is mostly true, these issues pale when compared to the challenges faced by Fintech’s and startups, who find that dealing with OPM is altogether a different ballgame.
That’s because there are challenges and there are challenges. If you think Banks have challenges, being ‘Innovative’ or ‘Transformational’, you ain’t seen nuthin’ yet. FinTech’s and startups face their own issues. They are different but equally, if not greater…well…challenges.
Ninth – any founder whose startup owes anything to Venture Capital or Venture Capitalists will tell you just how much time, effort and energy goes into keeping them happy, and how quickly the promises and valuations can and do evaporate or disappear into thin air, when things don’t turn out as planned.
VC’s expect their ‘Pound of flesh’
Tenth – if your startup or Fintech is one of those very few, who ‘make it’ and show enough promise to potential VC’s that your Startup will generate cash or eyeballs, that’s great. But when VC’s – whose only interest is driving increasingly greater returns and valuation multiples – come knocking, there is very little choice other than knuckle down and churn more Revenue or eyeballs (see the bit above about balance sheets, and controlling ones own destiny). Resilient Banks appear to beat Fintech Smarts, at least on this one. This does not necessarily make vc’s or investors, ‘wrong’ or ‘bad’, its
Eleven – Most Fintech’s and startups, with VC backing end up in narrow, focussed, low-risk opportunities, in Payments or Remittances. Tha’ts because high fixed costs of compliance (or non-compliance) and fines makes the whole business of OPM a lot less appealing, to VC’s as Google ventures backed International Remittances operator, Ripple discovered in 2015.
Twelve – Fintech’s also face some serious challenges when moving to the the big leagues; Their founders and leaders are blessed with great ideas and loads of energy, but they also tend to lack the skills and depth needed to run complex, multi-disciplinary organisations; This lack of depth and experience may work in the hustle and bustle of getting a startup off the ground, but it can also be a serious impediment to their ability to scale later on (Travis Kalanick and Uber).
Leaders & Leadership
Thirteen – They often also find themselves hampered by weak and inexperienced leaders, drawing from a narrow and shallow pool of managers with limited experience outside of their core business – which in turn can lead to some poor decisions in areas outside their core business (usually technology). Not good when dealing with OPM.
Banks on the other hand have very, very deep wells of skills, resources and capital underpinned by powerful balance sheets. Don’t underestimate this. It may be boring but it’s worth pointing out the role that banks and bankers play in the creation and circulation of wealth and money in our financial system puts them in a lot stronger position than I think people give credit (no pun intended, really). To get an inkling of what this really means, read this article. Nuff said (Resilient Banks & Fintech Smarts)
So does this mean that mean Banks have ‘won’? Not really. If anything, the competition for customers, growth and value creation remains hotter than ever. The new battleground is still in the value of great people, the power of great ideas and the ability to flex and evolve over time, however banks are very much front and centre in the competition for customers, market-share and mind-share.
Battleground of ideas
My point here is not to trash Silicon Valley, Fintech’s and startups, but for Banks to stop panicking and get on with the business of being Banks. Fintech’s are (mostly) an extremely powerful force (mostly) for good, bringing new ideas, inventions and ways of doing things to market. However the world has changed. Fintech’s are simply not the ‘threat’ they once were. There is simply not enough evidence to suggest that banks are about to disappear; or relegated to the back-room.
Its just that Banks are really good at some things (like dealing with OPM) and Fintech’s are good at others (like getting stuff done and thinking up cool, new stuff). Or to put it another way, resilient Banks vs Fintech Smarts.
What this amounts to is that it’s easier for Fintech’s and startups to work with incumbent banks and vice versa, rather than against them. Which, incidentally is how things are starting to shape up in the real world.
Banks and Fintech’s are really smart at figuring out what they are good at, and exploring new ways of doing business as partners, vendors or service providers. That’s where the new opportunity lies for banks, but caveat emptor, as the saying goes. Its down to resilient Banks versus Fintech Smarts.
So, as we head into 2019, it appears as if the brave new world of Banking looks a lot like the old, except with some new curtains and a fresh lick o’ paint. You can take that to the bank.
* With apologies to that awful Netflix show of the same name
* You can choose which definition of Millennials works. It’s really up to you
* The one exception that comes to mind is Amazon, which is making great strides in payments, but again, payments is not Banking. Another is WeChat & WePay.
* OPM = Other Peoples Money