So I’m talking with a group of corporate bankers and the conversation goes into the normal alleyway. This alleyway is the one that says: “we are corporate bankers and will not be disrupted”.
The conversation goes something like:
So all the hot and sexy stuff with Fintech is in the consumer space. It’s retail and small bean payments. Yada, yada, yada. We are different as we sit in a ‘special relationship’. Our corporate clients love us and have been with us for years or even decades. They won’t change banks as why would they? Who else understands their business like we do? So, we know we are sticky and have them locked into a relationship based upon subject matter expertise. That’s critical.
I agree with this to some extent, but it does not create a warm feeling in my stomach to see that corporates are locked into their banks just because their banks have been with them a long time. So what would make a company switch their banker?
Again, the alleyway response pops up:
Oh corporates don’t change banks. There’s no reason to. The management are happy as long as they have an efficient product supply chain structure and receivables and payables are managed on time. The only reason they would ever change that is because of risk. Risk in the system in 2008 has seen quite a few corporations diversity their bank portfolio for example. So rather than concentrate their banking services with one or two large global banks, most companies are now using three or four regional banks to process in each region. That means we are competing more, as you have to compete to ensure you get that piece of their business, but that’s more a margin squeeze than a customer loss.
As I listen to this dialogue which I’ve heard often, I do struggle as this means that companies are too lazy to challenge their bank, which is probably the most likely scenario. But here’s the rub. Things are changing, thanks to tech.
Take Kabbage and Funding Circle. I cannot believe that small businesses are being pushed by banks to go to Funding Circle in the UK. RBS and Santander are saying: “if you don’t meet our risk criteria for this loan, try Funding Circle as they are more flexible”. This is like saying: “get lost loser”.
No wonder, according to one recent survey, 77% of companies that have used Funding Circle say they would go there first next time, rather than to the bank. And no wonder, as Funding Circle, Kabbage, Lending Club, Prosper et al are all working on peer-to-peer platforms at micro basis point differential in near real-time, unlike traditional banks who operate through high cost infrastructures of people and buildings at macro basis point margin in long time.
So yes, there’s a margin squeeze in the credit markets that is starting to impact banking. It’s small beans today but downstream? It’s almost like seeing this Giant Snail rolling towards you spreading slime all over your operations. When the Snail is a mile away, it doesn’t look so big so you can ignore it. But then, as it rolls right over your core business ten years later, you’re surprised and go: where did that come from?
Already Household Capital forecast that P2P lending across the wholesale and retail markets will be worth $1 trillion in ten years, so why aren’t you gearing up for this today?
Because it’s too far off and there’s this complacent view that you have stickiness with corporates. They won’t leave, as it’s too difficult. Funding Circle, Kabbage and all those guys? They’re for the smallguys. We’re there for the big boys.
OK, so here’s another misnomer. If you’ve ever read Clayton Christensen’s Innovator’s Dilemma, the innate perception is that anything new and different is irrelevant if it’s cheap and dealing with needs you don’t want to serve. So like the unbanked and underbanked, the small business loser who can’t take payments or get credit, you go: “go over there. Deal with M-Pesa, buy Square, talk to Funding Circle”. Give it ten years, and you’ll wish you hadn’t done that as you’ve just sent tomorrow’s business over to the Snail.
Wake up guys.