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Do banks really need to change?

One of the comments that floated on the network in the last week was: banks can ignore digital.

That made me sit up and take notice and so I asked the person, a banker, what they meant.  Their explanation was interesting and went something like this:

Banks do not need to change and adapt and, for all of this talk about competitive issues and challenges with technology, it is not important.  We could quite happily sit here for a year and do nothing, and our balance sheet and results would look the same or maybe even better. 

Think about it. 

First, we don’t make our money from retail consumers but from corporate and investment banking.  That drives our balance sheet and shareholder returns far more than retail bank profits.

Second, we could do nothing on the consumer side and we wouldn’t lose many customers.  Most banks are operating at the same level as we are.  They move slowly and aren’t innovating greatly, so we’re all about the same.  If we did nothing for a year, I cannot imagine many of them reinventing themselves and stealing our customers rapidly.  Even if their offer was fairly compelling, most consumers wouldn’t switch anyway.

Third, a lot of our reporting of revenues and profits is based upon ifs and buts.  We make a lot of guesses and suppositions in our results based upon future contracts and returns, along with risk analytics that can change year on year.  As a result, we can create accounts that look far more attractive year on year, by using these different factors to improve or decrease the attractiveness of our returns.

Fourth, we are driven by cost-income ratio and shareholder return.  Therefore, investing in retail bank infrastructure to improve customer service doesn’t cut the dice.  In fact, most of this would be overhead investment rather than balance sheet improvement.  It would increase cost, not necessarily improve income and decrease shareholder return.  As a result, we change only if we have to.

Fifth, we are protected by our licence.  I liken it to an army camp.  You have free movement of people outside the Ministry of Defence camp but, inside, it’s a lockdown situation. That’s pretty much like money and banking.  Outside the industry your can have free movement, so people can create pretty apps around money.  But the money movement itself is ring-fenced by regulation to be secure, resilient and reliable.  It’s a financial encampment that has to be police forced.  As a result, we can just sit in that camp for a year and not move, and nothing is lost.

I could add many more factors related to speed of change and ROI, but the force for change in my institution is not there.

How depressing I thought … is he right?


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Chris,
    This is why I’ve consistently argued that we’ll see a shift towards the customer experience being owned by digital players, and the banks hunker down to just a core of risk management, product manufacturing and compliance related stuff. The incentive to become truly digital is tough for a bank unless they are truly committed to retail.
    Having said that, in respect to risk and margins and efficiency, banks are becoming increasingly poor generators of profitability as you and I have both written on before. Digital pure plays are 7-10x more profitable per employee than banks. So while your banker friend might not feel the need to change, the market will demand that change in any case.

  • Chris,
    This banker seems to forget an important thing: retail deposits. While it is probably the least accessible (at least as like-for-like products) piece of banking for startups, forgetting this means lots of funding difficulties for banks in the future.
    Sure, you can get wholesale funding, but that’s probably more expensive otherwise it would be done on a wholesale basis (excuse the pun) already.
    Just watch when someone finds a better alternative to deposits – similar had happened with Alibaba and Yue’bao, although as a regulatory ‘hack’ – banks were simply not allowed to offer better retail deposit rates even if they wanted to…
    Also, this guy doesn’t seem to ignore ‘digital’ (whatever the definition) but retail customers.
    Or most simply, as Sean Park mentioned on Twitter: “Banking version of “I think there’s a global mkt for maybe 5 computers”