Bricks and mortar or ones and zeroes? While you’d be hard-pressed to find a bank headquarters made of secure, lumbering concrete and gilded gates; the glossy, glass chic towers that denote innovation and financial power may soon become the architecture of the past. Convenient, better-value and putting control in the hands of the consumer. The simple fact is that the expensive real estate, personnel and community presence required to operate a traditional bank cannot match up to the omnichannel experience offered by FinTech banking solutions. Once online security concerns are ameliorated, the unparalleled potential for customer-led and personalised financial management offered by online platforms, will make them the ideal battleground for establishing the status quo of future banking. Fingers are pointed at regulatory changes such as the Payment Service Directives (the first of which allowed non-banks to enter the payments market), and consumers expecting an increasingly accommodating ‘do-it-for-me’ service, but the common denominator among all developments is that the tide is moving with innovation. Put capable systems in the hands of every member of society, and individuals will either begin performing complex tasks without the need for a traditionally hefty corporate infrastructure, or expect to reap the benefits of an increasingly sophisticated and convenient standard of service at the tap of a screen. The real difference as far as the banking sector is concerned, though, is that consumers are basing their affiliations far less on brand loyalties and established reputations. With trust waning in traditional banks and their dated forms of interaction with customers, patronage is earned by the merits of their fluid and multi-faceted customer service(s). And the tide is certainly changing. Whether the shift to online services means a paradigm shift from traditional to challenger banks, or not, will largely be dependent on traditional banks’ abilities to adapt. Between 2015 and 2018, 2,868 bank branches closed in the UK. Between 2013 and 2018, global venture capital investment in FinTech jumped 329% to $36.6 billion. While traditional banks laud their established positions in the market – as well as their resources and security – there is a case being made by many that challenger banks are more equipped to aptly represent the priorities of the diverse modern consumer. In 2018 alone, challenger banks made up 27% of all global venture capital investment, and this looks set to rise with the likes of Revolut, Monzo and Starling Bank already establishing a foothold.  

Where is FinTech happening?

Revolut alone made a noteworthy appearance in the top ten largest venture capital deals of 2018, claiming $250 million in its fundraising. Similarly, Monzo, EToro, Liberis and BitFury all came in the UK’s top five VC yields, each claiming in excess of $80 million apiece. The fact that the UK – or more specifically, London – is a hotbed for these developments is hardly a surprise. Being coined as the ‘preeminent centre for FinTech in the UK’, London is home to 80% of all FinTech startups seeking VC in the UK, and lays claim to 90% of all capital invested in FinTech in the UK. The truth is that while London acts as a hub for FinTech disruptors and challenger banks – with Monzo, Starling Bank and Revolut all based between Moorgate and Canary Wharf – this trend is perhaps proportional to London’s stake in financial services globally. The City is technologically enabled; with the infrastructure and bluntly, the hardware, necessary for some of the most ambitious companies to set up base and disturb the financial status quo. An interesting trend to note, however, is that many analysts say that the greatest ripples caused by FinTech, are occurring outside of the traditional financial centres, and in the Asian and African continents. This isn’t to say that FinTech companies do not operate to the same extent in the West, but that their adoption and the consumer transition to FinTech solutions has not been as seamless and widespread as it has been further afield. Take China, for instance. While we in the UK are coming to grips with mobile banking and slowly beginning to trust mobile payments, our uptake of FinTech infrastructure is happening at a snail’s pace (comparatively). In China, mobile payments eclipse cash payments. Even some three years ago, in 2016, mobile payments represented $8.6 trillion of businesses’ takings. The same can be seen with pan-national FinTech infrastructure in the African continent, with developments such as M-Pesa and M-Shwari allowing users to save and borrow using their mobile phone – and perhaps showing the benefits of not having such an entrenched network of traditional banks. According to Sitoyo Lopokoiyit, Director of Financial Services at Safaricom PLC, “We’ve created a fintech bank that transcends anything […] You can open an account without going to a branch and get credit without seeing a loan officer. Traditional banks can’t sell to the bottom of the pyramid; but with M-Shwari, CBA is making about 70,000 loans a day.”  

What about GAFA and BAT?

Another interesting trend to be noted, too, is that the largest FinTech undertakings are not occurring with the challenger banks lauded and alternatively feared by market commentators in London. Rather, established players with the largest market caps take that crown, and start off by offering convenient payment solutions. Once again referring to the Chinese market as a model, the payment subsidiaries of behemoths Alibaba (NYSE: BABA) and Tencent (HKG: 0700) claim 90% of the mobile payment figure stated above, and both run their own banks – MyBank and WeBank respectively. Speaking on the two companies, Raj Rajgopal, president of Virtusa’s Digital Strategy Group and head of Virtusa’s China Insights Group, commented, “Alibaba and Tencent are creating the future of banking […] All services in China will be consumed via them, which gives them access to valuable customer data. They know everything about you.” What we can take away from this is the observation that these companies are, with an unavoidable trajectory, seeking to become universal and omnipresent experiences for consumers. While this is neither an original or new theme for large companies, the arrival of FinTech poses a change to consumer behaviour, whereby financial transactions become as seamless and menial as any other retail activity. The key to this is the integrated systems format that these companies hope to offer with their range of services, that is ultimately facilitated by financial services catching up to modern-day technological capabilities. The natural next step is to wonder when an all-encompassing and tech-enabled retail experience will become the global norm, and in reality, it may not be far off. The nature of the Chinese market means we cannot take its example as gospel, but it would be a fool’s errand to think they weren’t blazing a trail for the West’s equivalent mega companies. If we look at GAFA in the US for instance (Google, Apple, Facebook and Amazon), these tech giants already offer FinTech payment solutions and foster the largest customer bases in the West, garnered by their respective online stakes in social and retail activities. Taking ApplePay alone, the company’s aim is to make its software its customers’ primary means of payment. Its userbase of 127 million in 2017, and deals brokered with banks such as Citi, Chase and Wells Fargo mean that the only realistic obstacle to its expansion, outside of potential future antitrust cases, is resistance to the uptake of such payment solutions by established financial groups, who are struggling to keep the pace. Rather than imagine that payment technology is the final step for these multinationals, we should entertain the possibility they will take a leaf out the book of challenger banks and their Chinese counterparts, and seek to provide banking opportunities as part of their existing plethora of online opportunities.  

Are Banks ready?

No, not really. If we are referring to the ‘traditional’ model of banks we know in the UK – who spent decades expanding their highstreet presence as an expression of their stake in the market – then definitely not. If you’ll let me use a somewhat contrived analogy to represent the current dynamic of banking in the West: its like a parent using their new smartphone with one hand and holding a toddler rein in the other, while trying to balance a beachball on their head. The parent is a traditional bank and the toddler is a challenger bank. The parent is trying to figure out how to use and set up their new smartphone (online banking or more broadly, FinTech) while holding the child back from running ahead without them – of course there’s a degree of irony because the child won’t have to take time to learn how to use the new technology or change its behaviour to rewire its way of doing things, it will have been born into a world of tech – all of this while trying to hold the beachball steady (a metaphor for the challenge of trying to keep their existing services going while developing new ones). Was that a bit of a stretch? It was meant to be; the bottom line is that traditional banks have the unenviable task of changing with the times, when they had comfortably established themselves in the old way of doing things. This isn’t to say that the ‘old way of doing things’ will soon be extinct, just that there is and will continue to be a shift to online services. As far as highstreet branch banking is concerned, traditional banks have the upper hand, for what its worth. The problem is that running branches isn’t just expensive in terms of staff, rent and upkeep, but that the added value offered by branches needs to become more pronounced for their existence to make sense. Barclays (LON: BARC) among others are currently following the lead of innovative retail outlets and trialling concept branches – a physical experience which adds an element of social involvement and value to both the brand and banking experience. Again though, this won’t stop the oncoming tide of FinTech. There is currently a bit of a joke circulating that if a bank were to incorporate a coffee bar to add value to their branch, why not just cut out the cumbersome banking element and have people doing their online banking in a Barclays coffee shop? All anecdotes and speculation aside though, banks aren’t doomed, but they aren’t leading the way either. In research published by PricewaterhouseCoopers, their findings for the necessary future steps of traditional banks can be boiled down into two areas – innovation and a customer-centred business model. Their findings found that only 17% of executives from over 500 major banks worldwide felt ‘very prepared’ for a customer-centred banking experience. What was more worrying though, was that 87% understood online capabilities and innovation to be important, while only 11% felt sufficiently prepared. If we feel like condemning traditional outlets further – 31% of executives view ‘nontraditional’ banking players as an opportunity for partnership, while 55% felt they represented a threat to traditional banks.

“Fewer than 20% of executives feel well-prepared for the future” said PwC in their headline statistic.

Challengers are not only led by bright and hungry entrepreneurs with a fresh starting point, but they are also backed by futurist investors seeking to have a stake in the next big thing. In contrast, while the resources of traditional banks are extensive, their vast and entrenched infrastructures make it difficult, expensive and to an extent embarrassing for them to change their way of doing things. Take Deutsche Bank for example; last year it was overtaken by little-known payment processing company Wirecard, as Germany’s most valuable financial services provider. On July 7^th 2019, it announced its latest modernisation restructuring, which is expected to cost 7.4 billion euros and cut 18,000 jobs by 2022. In short then, banks will have to continue their laboured effort to keep up with the modernising effects of seemingly perpetual innovation, whether they like it or not. The difference is, their restructuring and shift in norms will be painful, whereas challenger banks and tech giants will only need to obtain a licence and write the necessary code to start their new online business. As stated by Raj Rajgopal, “You can now build a new bank in six months, using technology from fintechs”.  

The Bank of the Future

It is ill advised perhaps, to suggest the future of anything will be this or that, with technology and how we decide it should manifest moving in near-fluid motion. What can be done perhaps, is entertaining some superficial vision of how a bank will appear to consumers in the near future. Co-founder of financial education company Bud, Ed Maslaveckas, predicts, “The bank of the future will be inherently social and use intelligence to connect groups together. Customers will still need somewhere to go, but the opportunity is to create a Carphone Warehouse or Apple Store-like experience in banking that connects ecosystems […] For SMEs and corporates, it will be about creating better business-intelligence and financial-management tools using data so that they can better segment and distribute their products to customers.” “[The bank of the future] is an app that you use multiple times a day, not only for financial products, but for a lot of the problems you need to solve,” he says. “It will give you access to the right mobile contract and make recommendations that make customers happier.” Its edge will be its ability to be capable but invisible, and ultimately “frictionless”. And according to Sitovo Lopokoivit, whose company launched one of Africa’s premier mobile banking entrants, “[The bank of the future] will be AI-driven […] The key [technologies] will be the smartphone, machine learning, AI, Big Data, robotics and chatbots.”  

The bottom line

A property crash, a recession, even Brexit. All are valid concerns for shareholders of big banks. But without a doubt the rise of FinTech and online challenger banks offer greater cause for lost sleep. While Monzo currently runs at an estimated loss of £50 a year per new customer, they and Revolut offer similar services to their more established competitors but for better value and are specifically designed to cater to the needs of the modern, global consumer. Despite the protracted, and I’d like to think necessary, narrative I’ve laid out above, the immediate area of concern for traditional banks is that these new players (Revolut, Monzo, TransferWise) offer services that involve activities such as exchanging currencies, without the hefty fees demanded by large banks. If they hope to capture the increasingly proactive and technologically enabled next generation of savers and investors, FTSE 100 banks need to adapt to the increasingly competitive market of banking services. As far as big tech companies are concerned; banks can only pray that GAFA are interested in entering into partnerships, and are unable to follow the example of their Chinese counterparts by establishing their own banking arms.