When this writer started in banking over 30 years ago he read something that Walter Wriston, chief executive officer (CEO) of Citibank/Citicorp (later Citigroup) from 1967 to 1984, wrote; it was along the lines of “information about money will become as important as money itself.” These words have always struck me as being wise and interesting and they are certainly as true today as they were back then.
Corporate banking is becoming more about data (information) management and sharing than ever before. If banks don’t realise this quickly and react and innovate they will be lose market share, or be eaten by their competitors. Competitors are no longer just other banks but also fintechs, which see the banking sector as ripe for picking.
While working in banking as a cash management product manager in the Eighties and Nineties, it was always surprising how long things took to change. There was an attitude that all changes had to be slow and – more importantly – when agreed they could only be carried out by the bank’s internal technology team.
There were probably good reasons for this – security and hardware limitations were normally put forward but it was so frustrating. When someone came up with a good idea it took years to see it through, or more often than not it just didn’t happen. Times have certainly changed and today we expect to see things happen much more quickly. Attitudes have also shifted and the effect of the fintech revolution has been to rethink just about everything and disrupt the old order.
From bank to digital house
If this sounds dramatic, just listen to what some bankers are saying. Francisco Gonzalez, chairman and CEO of BBVA describes his role now as turning his bank into a “digital house”. He says that banks “work with data” and “money is data”. This is, it seems, exactly what Walter Wriston was saying all those years ago, except now it’s not just a thought but has become a reality.
What BBVA and other banks are doing is completely rethinking their strategy and infrastructure to take advantage of what new technology can bring them. They are throwing away the old infrastructures and starting again. Not before time – most of the major banks developed their platforms in the Seventies and Eighties. Over the years these platforms have been patched up to enable them to keep going but they are in effect “spaghetti networks”, and by that nature they are complicated and slow. There comes a time when patches are not the answer and there is a need to start afresh. The global economy ensures that activities such as money movement take place real time and are reported real time – it’s all about data.
There are also entirely new competitors entering the traditional banking space. These are the fintech companies, which are new, hungry, nimble and don’t have all the systems baggage that the banks have. They are the real disrupters.
Look at a few traditional banking products and see what’s happening. Payments offers a good example. Do you need a bank to make a payment? The answer is ‘no’. Non-bank payment service providers (PSPs) such as Circle, Payoneer, EarthportFX, Dwolla and many more, advertise that they can transfer funds quickly, securely and at a reduced cost (up to 90% some claim), to any beneficiary anywhere in the world.
For these services to work, access to the country’s clearing system is necessary and that requires cooperation from the banks, so the PSPs must piggyback a supporting bank to run the service. However things are beginning to change. Last June, the Bank of England (BoE) announced that PSPs will be allowed to hold accounts at the BoE, so that they can compete with existing banks to provide current accounts.
Further, it was announced that the BoE intends to extend direct access to the UK clearing system; thus allowing a range of non-bank PSPs to compete on a level playing field with banks. Where one central bank moves, others are bound to follow. Little wonder then that banks are starting to wake up to the realisation that a big shake-up is happening while they are sleeping.
The lending arena
A further area of traditional banking is lending, where again banks are seeing competition from fintechs. Consider companies such as Zopa, the peer-to-peer (P2P) lending provider. Zopa is a pioneer in this area, using the internet to cut out the banks entirely. Interesting to note that Zopa has now applied for a UK banking licence, in a move that will play the traditional banks at their own game.
P2P lending is moving into the business arena with peer-to-business (P2B) lending being offered by companies such as Funding Circle. This would appear to be the start of something quite dramatic, as we see the possibility of short term funding being provided by non-bank institutions.
In fact, one can take most or all traditional banking products and somewhere there is a fintech company developing a competitive product in the background.
So how are the banks responding to all this? We have already seen how BBVA is embracing the digital technology and rewriting the script and other banks are also responding. Barclays, for example, describes how it is “waking up to open innovation” and Magdalen Kron, Barclays’ open innovation expert says that “banks need to think of themselves less like financial institutions and more like technology companies”.
A unique partnership between Barclays and start-up accelerator Techstars brings two networks together into one accelerator programme, offering fintech entrepreneurs access to a leading bank, but also to Techstars’ international mentor and investor relationships.
It is in the banks’ interests to be part of the fintech development; to influence it, if not to take a direct part. Those that don’t may sometime soon regret ignoring what is possibly the major disrupter that banking has seen for decades. The traditional banking model is gone and a brave new world has been born, one in which information about money is as important as the money itself.
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