Every single institution and profession is under attack from the disruptive forces that are reshaping the world in a manner that is as relentless as it is unstoppable. The change frontiers are both ‘out there’– be that new frontiers in technology, massive geopolitical, demographic and economic tremors as well as changes that are ‘in here’- societal value shifts, mind-sets and worldviews. On all these fronts there is a constant morphing, adjusting and reforming that is taking place, all of which make navigating the future difficult and predicting it, impossible.
These disruptions and prevailing conditions are undermining the very foundations of traditional institutions as we know and experience them and giving rise to new and different ‘institutions’ that look nothing like they’re supposed too. The traditional banking institutions are amongst the last to adapt to these compelling forces of change and many don’t think that they have it in them to make the necessary changes.
Perhaps then it is no surprise that those gathering at Davos 2016 will be focusing on the future as well as the world’s current economic ill-health.
Banking analyst and author Brett King, believes that the next 10 years will see more disruption and change in the banking and financial sectors than the previous 100 years have yielded. It is hard to disagree with King’s assessment given the inroads that technology driven start-ups are making into the world of transactions and how we lend and borrow money. The image is one of the traditional banks wallowing in shallow waters like a stricken whale while aggressive, fast and hungry sharks tear into the whale, one bite at a time. With each bite more damage is done and it is only a matter of time before there is one bite too many, the bite that proves fatal.
Banks, as they are currently constituted, simply cannot adapt quick enough to a changing landscape. They are weighed down by primarily two factors: (1) A heavy regulatory burden in the wake of the economic meltdown of 2008 and (2) massive legacy infrastructure issues, none more so than in IT. Banking IT platforms and operating systems are out-dated and now have so many ‘bolt-on’ aspects to them that they are unwieldy, clumsy and flawed.
There are numerous business models that have blown established models out the water. Consider the following examples: Uber, the world’s largest taxi company owns no vehicles, Facebook the world’s most popular media owner creates no content, Alibaba, the most valuable retailer has no inventory and Airbnb the world’s largest accommodation provider owns no real estate. The industries rocked by these young pretenders certainly didn’t see them coming nor were they prepared for the disruption that ensued. There are numerous emerging business models within the financial sector that are doing much the same as Uber, Facebook, Alibaba, Airbnb and others.
Giles Andrews, CEO of Zopa, a peer-to-peer lending business, said, “Zopa and other peer-to-peer lending businesses are not looking to replace banks in their entirety; we are looking to do a slice of banking more efficiently and better”. It is that ‘slice of banking’ that Andrews refers to that represents the ‘one bite’ that will ultimately prove to be fatal for the current banking model. Noteworthy is that Zopa is doing lending better with a 60% year-on-year growth, loan rates of 6.7% with a 0.5% default rate. Peer-to-Peer only represents a small percentage of the lending market (in the UK it is 3%) but it can only grow. Another bite, another open wound with yet more blood in the water.
Brett King puts it succinctly when he writes: “It is entirely possible that banks, with their heavy regulatory burden, high capital adequacy requirements, massive legacy infrastructure, and long held conventions, may just have trouble adapting to these tectonic shifts.”
In TomorrowToday we have the privilege to engage with multiple global banking brands across the planet and as such enjoy an excellent vantage from which to view this industry. There is cause for concern as in many cases Banks seems to be continuing along a line as if it is ‘business as usual’ and seem to think they are immune from some of the disruptions that they are facing. They are often dismissive of the sharks that are both circling and biting and seem stuck when it comes to real conversations and strategies around how to be futurefit. It is a concern.
Let’s hope that this sector emerges from Davos understanding the real and present danger of blood in the water; that they leave with the resolve to do something about it even it means innovating their entire business model. Easier said than done but it is what is needed if banking institutions are to have a future.
Fintech and the Disruption of Banking
We recently hosted an informal breakfast on the ‘Future of Financial Services’, where we invited clients from the Financial services industry to join us for a discussion on this topic.
The discussion was based on our latest research report on this pertinent topic, if you would like to download the executive summary of this report you can do so here.