Are banks too big to SCALE? Who's to blame

The ever-increasing size of traditional, long-standing banks has been a fascinating point of discussion for many years now, with the possible problems arising from banks being “too big” having far reaching consequences. The financial crisis heightened the pressure for regulators to be more stringent on capital adequacy, but high profile government bail outs prompted many to question whether “too big to fail” banks should remain so large and influential. While the financial crisis is no longer at the forefront of our minds, the global digital revolution is seemingly impacting every aspect of banking, with no signs of slowing down. While digital banks and fintechs are well equipped to face the challenges the impact of digital preferences and advances will have on the industry, larger traditional banks seem to face a multitude of struggles. With the unprecedented growth of digital interactions and transactions, this blog series looks at whether the new and emerging demands on banks’ legacy systems will mean they are too big to scale?

Transaction growth in the last year alone has been monumental, seeing a 10% rise in 2015[1]. Payments methods are becoming overwhelmingly mobile as the use of cash is dropping, with the volume of mobile payments via a smartphone, tablet or wearable growing by 300% a year[2]. 34% more customers have made use of mobile payments in the last year[3], showing a clear shift to digital and the self-service options it provides. Transaction growth is also being heavily impacted by the popularity of pay-as-you-go subscription services such as Netflix and Spotify, instead of occasional, individual purchases of media. The rise in digital services, able to reduce their business costs, such as Uber not owning any vehicles themselves, creates opportunity to offer a cheaper service, encouraging repeat transactions and resulting in a greater volume of payments and rides. Both the change in channels and vast transaction volume puts pressure on large, aging bank systems, while smaller, younger, digital banks with more flexible systems are not impeded as heavily.

The changing payments habits of consumers will be further altered with the ease of access automated Internet of Things (IoT) technology will create. As far back as 2008, there were more objects connected to the internet than people[4], and a not-so-distant future where devices including refrigerators and washing machines will be connected to the internet is fast approaching. Already, washing machines can hold enough washing powder for multiple washes and are able to detect when quantities are running low, but it won’t be long before they’ll be able to automatically re-order the powder themselves. The potential in payments services using this technology is limitless, as every bank customer could have dozens of devices linked to their bank account, with frequent automated transactions able to occur. The use of IoT will also generate huge volumes of data, stored by banks and able to offer insights into customer intentions. Smaller and digital-oriented banks should be well-equipped to offer IoT services and benefit from the data it will collate, but the scale, cost and maintenance of IoT banking processes raises questions over whether big banks will be able to make the best use of it. Many may not have the architecture to facilitate this communication of devices, as their limiting data silo issues prevent communication of current data. Though some banks are considering the application of IoT to banking, such as U.S Bank’s Innovation Lab project involving cars able to order items to repair themselves, this is not common practice for traditional banks, and it’s likely those that aren’t able to make use of IoT opportunities will become obsolete.

[1] ttp://www.mobilepaymentstoday.com/news/study-global-digital-payment-transactions-set-to-reach-10-growth-for-first-time/

[2] https://www.finextra.com/pressarticle/66547/mobile-payments-soar-as-europeans-embrace-new-ways-to-pay---visa

[3] https://www.finextra.com/pressarticle/66547/mobile-payments-soar-as-europeans-embrace-new-ways-to-pay---visa

[4] http://www.forbes.com/sites/bernardmarr/2015/10/27/17-mind-blowing-internet-of-things-facts-everyone-should-read/#54a379191a7a