There’s an old joke about the guy who’s lost driving in the countryside who stops to ask a pedestrian how to get to the city. The pedestrian replies: “oh, if you want to get there, I wouldn’t start from here”, and this is exactly how banks feel today. They want to get to the nirvana of new technologies, but are stuck in a spaghetti of old systems. Some call them legacy, others call them handcuffs, but whatever they are is a problem. The problem is that old systems and legacy technologies stop the bank moving forward into the nimble and agile future on offer today, and this is exactly what FinTech start-ups believe they can exploit as it is clearly a weakness for the large banks.
What we are seeing is many new companies launching capabilities built upon the latest internet-enabled technologies. These include easy-to-use apps for customers, simple to add code for merchants and open systems to allow anyone to work with them. It is almost like banking in an apps store. Hundreds of companies offering thousands of services that are simple and easy for sending and receiving money. These companies include firms like Stripe, a six-year-old start-up that is the preferred code for building online checkout services. Really easy to work with, the company is the chosen system for many other innovative companies including Kickstarter and Apple Pay, and valued at almost $10 billion by the end of 2016. Not bad for a six-year-old start-up. The reason why they have gained such a valuation is that they have taken something the banks make difficult – setting up online payment services – and made it incredibly easy.
Similarly, there are companies that do similar things in lending, savings, investments and other specific areas of financial services based upon internet technologies. These companies have names like Zopa, Smartypig, Nutmeg, etoro and have fun branding and cool offices. They are very different to banks and are collectively known as FinTech, financial technology start-up companies. They all share many of the same attributes, in terms of being young, aspirational, visionary and capable. This is why collectively they have seen investments from venture capital and other funds averaging $25 billion for the last four years, according to figures published by KPMG.
However, there is a possible impasse here, as the most successful FinTech firms are not replacing banks, but serving markets that were under-served. Those seeking easy investing, better access to funding, supporting small businesses and turning mobile telephones into points-of-sale, are the FinTech firms that have the highest valuations and greatest success. However, none of them has replaced a bank. They are succeeding by addressing areas that banks find difficult to serve due to cost or risk, such as lending to small businesses.
This is why it is interesting today to see almost fifty new banks launching in the UK, many of which are FinTech banks. Atom, Starling, Monzo and more have bank licences from the UK regulator and considerable funding. However, they are up against the biggest UK banks who have millions of customers, billions of funding and centuries of history. For new players, fighting the large banks is going to be a challenge and they will need a lot of funding to succeed. This does not mean they will not succeed but they will need real differentiation and exceptional digital services. Even then, will customers switch? It will be interesting to find out but the one thing the new players have from the start is fresh technologies, no legacy and unconstrained thinking. Equally, they have no cost overheads and therefore can compete more effectively on interest rates. After all, big banks have an awful lot of branches that aren’t used much anymore. In fact, it may not be attractive to their customers or the media to shut down these branches but, if they do not, then the big banks clearly cannot compete with these new digital start-ups, even with their millions of customers.
Therefore, the fight for the future of banking is going to be between a host of new digital players and a few large banks who find it hard to change, but are adapting as fast as they can. Interesting times indeed.