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The past few years have been traumatic for the banking industry we once knew and trusted. From the days when the local bank manager was treated like a b-list celebrity, banks have been through a crisis of self-confidence, let alone liquidity and profitability. But while they were dealing with their own internal problems post-crisis, a whole new industry was emerging that will shape the future of the sector: financial technology and new, challenger banks.
In some ways, the financial crisis represented the end of an era and the germination of a new crop of institutions, which could confront the status quo. The things that banks and their customers took for granted were being questioned. People could no longer assume banks were safe, well capitalised, crisis-proof and, above all, the custodians of the only way to do banking. At the same time, technology was advancing at a faster speed than ever before, proving there was, after all, a different way. On top of that, regulatory change was sweeping across financial services, breaking down barriers and curtailing reckless behaviour. All of these elements created something of a headache for bank CEOs.
Enter the challengers
Challenger banks are being established all over the world. The UK, whose banks were fully immersed in the crisis, is fertile ground for these providers, with names like Metro, Monzo, Atom and Starling coming more and more to the fore and successfully raising capital in the market.
Dolfin Chief Operating Officer, Amir Nabi, believes the time was right for these companies to emerge. “The eco-system has been shifting to accommodate these companies,” he says. “Technology is so integral to our society today and these banks are heavily based on harnessing it to form powerful tools that can enable their clients to achieve their objectives.”
“New banks have an advantage in that they don’t have legacy tech and so they can be more nimble.”
Amir Nabi · Dolfin
All banks depend on technology, but the traditional model invariably carries with it issues around old, bolted-on systems, bureaucracy and very confused strategies. “Many of these new banks have an advantage in that they don’t have legacy tech and so they can be more nimble and more responsive to their customers,” says Nabi.
Those customers include a new generation that has little affinity to the old banking system and is more than comfortable conducting transactions through their smart phone. But luring customers away from the incumbents is not an easy task and despite the crisis and subsequent scandals, people have remained remarkably loyal to their banks. There’s still a degree of trust because they are heavily regulated, backed by government guarantees and firmly embedded in the financial system, notes Brian Caplen, the Editor of The Banker magazine.
The problem of scale
Caplen also points out that many of the challenger banks may have trouble achieving scale on their own and believes the real existential threat to traditional banks is more likely to be found in the big platforms. “The huge tech firms like Amazon, Facebook and Google, should they enter specific financial services, certainly have the power to take substantial amounts of business away from the banks,” he says.
“Banks could sell banking services to tech companies, enabling platforms to enter banking without actually becoming banks.”
Brian Caplen · The Banker
However, technology companies may be deterred by the rising cost of being a bank and the regulation that goes with it. “What we may see is companies like Amazon selling services to banks or partnering with incumbents. Alternatively, banks could sell banking services to tech companies, becoming suppliers, enabling platforms to enter banking without actually becoming banks,” adds Caplen.
This may cast the old banking model as a form of utility, offering core services of their own along with the connection to a whole array of niche products from selected partners.
Regulating the revolution
Regulation, though, is shaping the landscape of tomorrow, notably the Payments Services Directive 2, which will accelerate the concept of ‘open banking’. Established banks, accustomed to having control of disciplines like payment processing, are especially nervous about PSD2, given it forces them to share customer information via application programming interfaces, opening the door for new competitors. This is good news for customers, who will have more choice around who they select as their banking partners. “This removes the monopoly that banks have had for many years, but naturally, with the banks now opening-up their data to third party providers, there will be some anxiety around security,” says Nabi.
“Innovative technology-driven banking will eventually engulf all areas.”
Amir Nabi · Dolfin
Nevertheless, he finds the shift to a new dynamic very exciting and aligned to Dolfin’s own ethos, presenting the opportunity to connect its clients with best-in-class services. “The momentum we are seeing in the banking industry certainly plays to our own thinking. Many companies have started out focusing on payments or FX, but they are now moving into the wealth management market – innovative technology-driven banking will eventually engulf all areas of the industry.”
However, Nabi says not all institutions will thrive in this new environment. “There are more new banks around than people fully realise, but most of them will struggle to succeed. Traditional banks now understand the future will be different and will involve a change of thinking, partnerships and, of course, technology. The banks that can marry that technology with the human element clients now demand, delivering a fresh alternative, will be the ones that truly flourish.”