Banks are extinct … oh no, they’re not

Curating the daily news yesterday, I was surprised to see an article published by Wharton Business School that irritated me.

Wharton Business School is one of America’s Ivy League Universities up there with Yale and Harvard.  It should be publishing informed insights but this post was more of a headline grabber from Scott A. Snyder, chief innovation officer at venture capitalist firm Safeguard Scientifics and a senior fellow at Wharton’s Mack Institute for Innovation Management.

Scott’s thesis is as follows:

[Bank] executives believe digital disruption will drive 40% of companies out of the top 10 in the next five years. As Antony Jenkins, former CEO of Barclays, aptly put it in a 2015 speech: “Over the next 10 years, we will see a number of very significant disruptions in financial services, let’s call them Uber moments”  …

Some analysts believe Fintech disruption could take as much as 10% to 40% of bank revenue and eliminate 1.7 million banking jobs by 2025.  Couple this with increasing regulation, historically low interest rates, and the fact that most (73%) millennials would prefer to get their banking services from a non-financial services company, and banks seem to be headed the way of Blockbuster.

The article continues …

Despite being one of the top sectors for technology investment over the last two decades, including the creation of major products such as ATMs, debit cards, credit scoring and check scan and deposit, banks are lagging other industries on digital transformation such as those in retail, transportation and even healthcare.

The good news is that banks are still very well-positioned to win with the new wave of empowered digital customers given their rich historic data and balance of physical and digital touchpoints. But it will take a strong commitment to a customer-centric vision, a two-speed business model and agile infrastructure to enable “Big I” innovation, and a data-driven approach to delivering personalized, relevant banking experiences.

For bank executives, it’s time to decide if you want to be Netflix or Blockbuster.  Your customers won’t wait forever

Now there is some decent insight in the article, but the reason it irritated me is that it follows so many articles over the past few years that claim banks will die, just like Nokia, Kodak, Blockbuster and more.

They won’t.

I write about this regularly but this blog from two years ago gives the puzzle as to where we are today and why this idea of banks on the precipice is so irritating:

A brainstorming session with a group of banks raised this question: are we going through a Kodak moment in banking?  Are we seeing a Nokia change?  Will banks miss the tipping point and die from the reformation of the internet, or will we respond and change in time?

We all know the Kodak and Nokia stories of moving from Hero to Zero (for those that don’t, the stories are repeated in depth at the end of this blog with Kodak first and then Nokia).

So here are a few things we know:

• We have seen other industries decimated by digital – books, music, photography – and know that the same is happening to banking
• We know that the greatest asset to a bank is data but banks do not leverage their data assets: according to Forrester, only 3% of data is tagged and less than 0.5% analysed
• We know that banks are structured inefficiently in product silos that lack customer focus
• We know that we have legacy systems that are inefficient and need refreshment
• We know that cryptocurrencies are redefining the digitisation of money and currency
• We know that 1,000’s of companies are launching new innovative models of managing money and value
• We know that billions of dollars is being ploughed into these new companies to force change in the banking system

We know we have to change.

OK, so we know a lot and it is clear that this could be a Kodak or Nokia moment.  Kodak invented the digital camera but thought film was still the future.  How wrong were they?  Nokia owned the mobile market but let Apple turn it into a cheap computer and steal their business.  Why didn’t Nokia do something sooner?  And banks are possibly going through the same.  Or are they?

I qualify the change in banking, as most people talk about banking as a protected industry unlike any other.  The regulatory, compliance, audit and governance requirements, combined with capital reserves that are massively onerous, mean that few can get into the banking game.

This has certainly proven true over the past 25 years.  During the past quarter century, everyone forecast that banks were dead and would be disintermediated.  Hasn’t happened.  It’s why there are only a few big banks in most countries, and little competition.

However, bearing in mind the list of challenges we face above, is that a good reason to sit back and be complacent today?  And what about all of these new fintech start-ups, will they change the business?

Most bankers I talk to today say yes.  The trouble is that most of the bankers are not sitting in a decision making capacity.  They are executors and implementers of digital strategies, and struggle to get their voices heard in the upper echelons of management.

The decision making executive team is more usually comprised of diligent banking people who have spent years dealing with regulations and compliance.  They are the ones who believe that is the barrier to entry, and that they only need to change due to regulatory or competitive forces.  They see digital as channel to market, and crypocurrencies as a game.  They have little interest in listening to the digital crowd who, more often than not, are seen as geeks and nerds in the banking cellars.

The question is: who is right?  Are the digital bankers screaming and shouting that we are going through a banking Kodak moment; or are their senior management right in saying we only need to change at the speed of the fastest competitor?