Banking without Banks

Disruptive digital banks, innovative start-ups and shifting consumer demands have already started to change the banking industry. And while it may not transform dramatically in the next few years, the springboards for some exciting progress are already in place.

Fintech is one of the world’s fastest growing industries and with the global sector set to be worth over £239.2bn by 2023, the banking digital evolution is a lucrative business and well underway. A growing consumer base have lost faith in the banks of old, so what does this mean for traditional banking, and can it survive the test of time?

Deutsche Bank cut approximately 20% of its total workforce in July, shaking the banking industry to its core, and Barclays have reported a fall in profits of more than 80% in the third quarter. Consequently, the banks CEO Jes Staley warned that the current uncertainty in the UK economy could impact heavily on the year ahead.  Likewise, Noel Quinn, the HSBC interim CEO who is auditioning for the full time position on the basis of strenuous cost-cutting, said the bank had suffered returns that were “not acceptable” in the third quarter, that previous cost-cutting plans were insufficient and that material cuts and “decisive action” are imminent. Finally, RBS isn’t faring much better and posted losses of a net 10,440 current account customers in the third quarter.

“The current banking industry is almost certainly facing a turbulent future as the incumbents continue to struggle to keep up with the seemingly endless growth of the fintech disrupters.”

At a time where things don’t appear too optimistic for the main players, a report by McKinsey revealed that banks are facing a “do or die” moment, and that approximately 33% were at risk if another global downturn hits.  Almost 60% of banks are not generating enough return on equity, and if the economy weakens in the next few years this problem will snowball, causing irreversible damage. “A prolonged economic slowdown with low or even negative interest rates could wreak further havoc,” the report stated.

The 2008 financial crisis initially tainted the financial markets reputation, but advances in technology have sealed the deal, and to survive, banking must become much more focused on the customer experience. The process of digitalisation has been challenging banks and financial institutions for more than two decades, and some of the biggest hurdles they face today include the unification of digital systems, the automation of processes and the establishment of efficient means to comply with regulations. Fintech is ultimately changing the way the financial sector delivers products and services to its customers, and banks will undoubtedly need to adapt to survive, but bricks and mortar banking still holds a valid place in the financial hierarchy.

FinTECH Talents, a global fintech festival hosted in London on November 11^th-13^th, gathered 4,500 industry leaders in one venue. Speaking at one session, Aritra Chakravarty, the CEO of Dozens, a London-based fintech start-up, reiterates that old-fashioned saving institutions are not necessarily at risk, but what particular form they take in the future remains unknown.

“Our history proves that you need these institutions,” she said. “But whether the current institutions that provide this service are going to be the ones that do so in the future is the bigger question.”

Ceri Godwin, CIO, Santander UK agreed, saying that while traditional banks would have to adjust, they won’t become obsolete any time soon and disruption should be seen as a positive thing within the financial industry.

“Banking is a target for disruption, and actually I completely applaud it,” she said.

Also, Josh Bottomley, Global Head of Digital, HSBC, highlighted that the future of banking was going to be “much more about the customer experience”, at the industry-led event.

At a time when transactions are increasingly handled online, the specific characteristics of retail banking – the queues, the ball-bearing chained pens and the limited opening hours—seem archaic. While the industry is addressing these challenges, it also has to contend with managing costs because, while they may need cutting-edge technology to stand a chance to compete, banks also demand value for money from their IT teams.

The current banking industry is almost certainly facing a turbulent future as the incumbents continue to struggle to keep up with the seemingly endless growth of the fintech disrupters. Anne Boden, the CEO of challenger bank Starling, also speaking at the FinTECH Talents session noted that it comes down to cost.

“It’s no more about innovation: it’s a war about cost base. Those banks that can manage their cost base will survive,” she said.

The future of banking is both captivating and confusing, but new approaches must rectify the structural issues within banks themselves, rather than try to patch over them, to ensure effectiveness. No one knows exactly what the branch of the future will look like, but the biggest threat to the banking status quo is the rising numbers of online banks which offer both realistic and evolutionary alternatives to the everyday consumer.

Recent developments and improvements within the market suggest that unless some change is imminent, banks may well be confined to the financial graveyard. The gloves are off regarding who will win the fintech fight but banks should welcome the disruption. With change comes growth and with growth comes increased profit.