I blogged a while ago about Anthony Browne, the Chief Executive of the British Bankers Association (BBA), talking at the Financial Services Club about the challenges facing banks. He covered it in five big areas of change:
- Competition between banks
- Competition between countries and regions
- Governance and ethics
There are a few other areas we could add, such as customer needs, corporate demands and generally the size of the institutions and their inability or capability to change. The reason I’m listing these here is that it gives us a nice framework to review the year in retrospect.
The year just passed and most of the regulatory discussions have been about the Payment Services Directive, Open Banking, and the implementation of Open APIs in Europe. That’s an important discussion, as referenced last week. It is also interesting because just as European regulators force banks to open their data to third party access, American banks are stopping customers from doing this. There is obviously a balance between security and open data sharing, but the difference in approaches fascinated.
Competition between banks
Similarly, Europe is seeing a burgeoning legion of new banks rise. Atom, Starling, Tide, Loot, Tandem, Monzo, Knab, Bunq, Solaris, Fidor, N26 and more are on the scene. This is because regulators want to fast track more competition in the banking markets, bearing in mind that in most of these markets the largest banks control over three-quarters of their country’s markets. Intriguingly, as Europe, the Middle East, Africa, India, Singapore, China, and other territories are encouraging as much innovation and start-ups as possible, there isn’t a single new bank in America. Not one. That’s because America’s regulatory structure is a complex web of state and federal bodies that makes it just too darned hard to create a new bank in America. That is changing however, as the Office of the Controller of the Currency (OCC) in America has just issued a fast track national charter licence for FinTech startups to go national fast. Equally, the internet heavyweights including PayPal, Amazon, Apple and Google created Financial Innovation Now (FIN) this year, and are layering pressure on Washington to allow them more access to control of the financial industry. That’s one to watch.
Competition between countries and regions
As can be seen, regulatory factors are driving much of the background to market change, but a great deal of regulation is driven by governmental politics. We can see this in the UK where the Cameron administration made FinTech a key focal point for leadership and strength. This year, I’ve noticed other countries standing up to the challenge, particularly Singapore where the Monetary Authority of Singapore (MAS) has done a great job of stamping their mark on the markets, culminating in the Singapore FinTech Festival in November. Other country capitals are also aspiring to be included from Mexico City to Tel Aviv to Dubai to Hong Kong. Across all of this we see the stamp of aspiration to be at least a regional player and, ideally, a global one. The big question overhanging all of this for FinTech London is the impact Brexit has on its position in these fields. Equally, how will America’s position play out, now that China is the biggest player in 2016 for FinTech investments.
Governance and ethics
Interestingly, 2016 was a much less scandalous year for the banks. Sure, there was the Wells Fargo account opening farce and the trail ends of LIBOR fixing playing out in the courts, but generally I didn’t see this year as a big one for bad bank behaviours. Rather, it was a bad one for bad bank security, specifically the SWIFT hacks. When the supposedly most secure infrastructure network in the world gets hacked not just once or twice, but on multiple occasions throughout the year, there has to be a concern there.
Just read my blog to know this one. What is really interesting is that 2016 saw the tide turn when big incumbent banks have started to pivot. Major branch closure programs aligned with increasing digital rationalisation and core systems replacements were topics that many banks announced they were tackling, doing, implementing and succeeding. About time.
For a retail customer, do they really need a better app? Do they need an app at all, when only half use them? In particular, is there any pressing need to change when 80% of the customer base doesn’t care that much. In the UK, 20 million people don’t even use internet banking yet, and that’s fifteen years since it first was launched, so it’s not exactly a desperate need. In fact, most retail customers are just happy popping down to their local branch and having a chat. If you don’t believe me, I got a survey yesterday that said 60% of millennials preferred banks with a branch location near them, and almost half would go to that branch to apply for loans, credit cards and other products. The branch is not dead, just resting, even though some banks like HSBC believe they can decimate them.
For a corporate, the needs are very different from their bank. The complexity of cash pooling and netting, foreign exchange transfers and global trade finance mean that many corporates are dependent upon their bank for funding and flexibility. Changing their bank provider is hard, although not impossible. Indeed, since the financial crisis hit, many corporates have reversed trend from consolidating bank relationships to a few global providers to diversifying their risk and having more regional providers. However, one notable thing has cropped up that may make a corporate switch: blockchain. I’ve seen a lot of activity in trade finance and supply chain using blockchain to track product sourcing activities this year, and can only expect this to pick up next year. If all the components corporations are sourcing globally could be tracked and traced in real-time using a shared database based upon blockchain technologies, that could be a real game changer and might even attract a few large corporations to switch their bank.
Ability to change
I’ve already mentioned that banks are decimating their physical networks, shutting branches down wholescale and laying off thousands of people as they go digital. Names that hit the headlines in 2016 included ING, Lloyds, HSBC, Deutsche and more. They must do this as we move from industrial age infrastructure to digital age networks. However, there are many banks that don’t have there yet or, if they have, lack the ability to lead wholescale change programs that would radically alter the bank, its structure and its cost of operations. For those dodging the bullet in 2016, there will be many who will get hit by it in 2017.
So there you have my short summary of 2016. Not exhaustive but enough to say it was a heck of a year. Roll on 2017 and the Donald Trump, Trump, Trump.