Is there still life in the old bank?

About 3 years ago when I started presenting on digital I’d open with a couple slides. The first about Fintechs nibbling around the edges of Banking the notion was these were piranha’s – one wouldn’t kill a bank, but there would be shoals of these that could. The second about GAFA (Google, Amazon, FaceBook, Apple) being sharks that could take larger chunks out of banking. The premise of the opening was that banks were under threat and if they didn’t change they could be squeezed out of the market.

Now as we face a new dawn of Open Banking I question that line of thinking, and I wonder whether it is the traditional banks that will get squeezed out or whether we will see a raft of FinTech fall by the way side and whether GAFA actually want to go anywhere near banking? I recently finished reading Elon Musk’s biography who too had questioned the efficiency and customer focus of banks and he wanted to disrupt banking. So it was interesting that he decided that banking was too complex and that regulation would make it very difficult for him to do that. So much so that he would only focus on payments, and in parallel focus his efforts on colonising Mars instead!

What I hadn’t accounted for was for new banks sometimes called “challenger banks” or neo-banks or even new business models like banking platforms.

Addressing Fintechs first: A Forbes article estimates that globally anywhere upto 6000 Fintechs having been created1. The article highlights OnDeck and Lending Club but despite growth in their sector both debuted in 2015 around $25, and both now sit at around $5!  It remains to be seen how the Fintech boom plays out in comparison to the dot com boom / crash of 2000.

The current trend is towards creating banking eco-systems, a collaboration of banks and Fintechs. The challenge for banks will be to pick “winners” and for Fintechs to get scale through this B2B approach and their own B2C efforts. I see a trend of “build API’s and Fintechs will come”, however I am not convinced the partnership will or should work this way (more on banking API strategy later this month) as banks will have to be selective about who they work with to protect the interests of their customers. Fintechs that heavily rely on a B2B approach will suffer on valuations for funding/exit, so scaling a B2C approach is key to their survival.

Next thinking about “challenger banks”. I fail to find an independent one that has amassed a customer base of more than 500,000. Simple has been acquired by BBVA, who also acquired Finnish challenger Holvi and have invested heavily in Atom. Similarly the German banking platform Fidor was acquired by BPCE. No pure play Internet banks survived and standalone brands launched by traditional financial services organisation have been acquired (or is that rescued?) such as Intelligent Finance and Egg in the UK. Whilst from starting out triple digit growth is the expectation, a year of double digit growth could define the writing on the wall.  

And what about banking platform plays? Moven has transformed itself towards a “front office” platform, whilst many others like Thought Machine are re-inventing “core banking” as a platform. Their challenge is similar to that of Fintech’s, getting scale. For them providing a solution that handles different regional issues like internationalisation, regulations and tax whilst also providing the flexibility to those on the platform to differentiate themselves is it not an easy task.

This doesn’t mean I advocate traditional banks not addressing the digital challenge, rather that “there is life in the old bank yet” and that you can “teach an old bank new tricks”.

1. https://www.forbes.com/sites/falgunidesai/2016/01/04/fintech-startups-face-difficult-market-ahead/#61b47247778c