Banks must innovate now or they will be replaced by Big Tech

The next bank you sign up to may not be a bank at all. It could be Apple or Square, Adyen or even Stripe. 

If the writing isn’t on the wall already, big tech is coming after banking. What started in stealth almost a decade ago with the introduction of wallets in smartphones is now moving into payments, deposits and lending -- core banking businesses. 

Earlier this year it was revealed that Apple has launched a solution that will essentially turn your iPhone into a point-of-sale terminal. This means, microbusinesses will not only be able to use their phones to make payments, but now accept them too.

This isn’t an isolated piece of innovation, it's the latest of a long-running series of encroachments from technology companies into the finance sector.

Payments giant Adyen announced it would begin offering banking services to eBay and Etsy sellers. In Australia, Tyro -- which started out as a payments business -- is now offering SME banking, deposits and lending. Following last year’s major acquisition, Square and Afterpay are moving in the same direction. Meanwhile, Stripe has launched a new platform called Treasury helping platforms and marketplaces like Shopify offer transactional accounts and deposits. 

The frontline for this trend is small business banking, an area that has historically been a blindspot for our major banks. 

Innovation in this SME banking space has been left to technology companies, and they have created solutions that do so much more than just process payments. They help SMEs save time by automating payments reconciliation, grow their business with actionable analytics, loyalty and marketing capability and efficiently manage chargebacks and payment disputes. Meanwhile, the banks have doubled down on what they know: enhancing payment rails and reducing processing costs.

This has allowed major tech companies to essentially take over the bank’s transactional relationship with their business customer, which is a key gateway for the further cross-selling of other core products such as deposits and lending. 

There’s much broader implications for the banks than just losing the payments relationship with SME customers. If this continues, they will be relegated to a back of house wholesale utility banking business where margins are a lot tighter, and banks will continue to carry the regulatory compliance burden. Banks will also be cut out of key parts of the global payments industry, which McKinsey recently valued to be worth $2.5 trillion by 2025. 

The answer to this challenge lies in banks changing the way they perceive partnerships and add-on services. All banks have already ramped up their partnerships with fintechs in recent years and this is a step in the right direction. But innovation and product releases are still siloed.

To fend off their tech disruptors, our banks need to create a single consolidated ecosystem across payments and value added services that competes with what the technology companies already have on offer.  As it stands, all major banks operate a suite of disparate solutions for their SME clients. These services do not talk to each other or share data and lack the capability to provide a seamless digital portal experience across the ecosystem. 

All of this should serve as a wake-up call to our major banks. Years ago, they vented concern about the speed in which technology companies had moved into the payments space. But now the battleground has shifted and it is now much deeper into the financial services value chain. 

It won’t be a better outcome for consumers or businesses either. If the Silicon Valley playbook holds true, the goal will be to capture market share with accessible and affordable technology, and then monetise when scale is achieved. Look at Uber for instance, it started in Australia as a cheap alternative to taxis. They captured market share and then ramped up prices. Seeing this trend repeated in financial services is a distinct departure from the stability we currently see thanks to the oligopoly. 

These technology companies have the scale, funding and means to make a tangible dent on our banking sector. Brand loyalty will not help; the era of staying with one bank for life is already slipping away. Hopefully our banks will act before they become another casualty of digital disruption.