The concept that banking is necessary, but banks are not has often been debated. The question of whether technology advances and new business model results in disintermediation is often dismissed as hype. While the Internet is undoubtedly the most significant technological advanced of the modern age, most retail bankers would argue that this only produced an incremental change in banking with yet another channel to access the existing bank infrastructure. However, that’s only partially accurate as an assessment.
If you look at the broader world, there are actually tons of new businesses eating away at the retail banking client experience:
Independent Financial Advisors
While banks proclaim platform, global experience, asset management capability, etc the fact is that the advisory space is not owned solely by banks. In fact, if you really want a dedicated Relationship Manager who is going to not just sell you a product you really only have two choices – IFA or Private Bank. The mass affluent HNWI space just doesn’t deliver…
Contactless Mass Transit Payments
Octopus in Hong Kong, Oyster in the United Kingdom, EZLink in Singapore and other such stored value smart cards are actually debit cards. Octopus has a limited banking license in Hong Kong for the purpose of deposit-taking, but let’s not kid about here – all of these are acting like banks, but aren’t banks. As banks we can justify the fact that these are minimal impact and argue that ultimately the payments come from the banks to “recharge” these cards, but the fact is we’re not in the mix.
In some ways the big hit of SIBOS this year has been mobile payments arriving on the scene. The only problem with this is that M-PESA launched in Kenya in 2006 and now ‘owns’ between 5-10% of Kenya’s GDP, GCASH launched in Philippines in October 2004 and now has 28,000 outlets supporting their services across the country. There are other examples too – Nokia is set to dominate the mobile payments space in India as they turn their stores into cash-in/cash-out points across the sub-continent. Where are the banks? Some banks are now offering withdrawal through ATM networks for mobile cash users, but the fact is banks are still arguing about interoperability, platform, security and alliances to be productive – so again banks are missing out.
Zopa now represents close to 1.5% of the UK lending market with monthly lending of GBP 10-15m. With a reported NPL of 0.7% they are also the industry leader in the UK for credit management. Bankers would find this counterintuitive – how can a non-bank have a better performing loan book than a bank? The answer is better value to the consumer, and social lending as the foundation. Prosper, Lending Club and others are also taking their fair share of the lending markets in places like the US. Average loan sizes for Lending Club and Zopa are not microfinance size either, being around US$2-3k. This is direct competition for the retail banking sector.
Peer-to-Peer and alternative Payments networks
PayPal is clearly the leader in online payments today, and while PayPal utilizes existing card networks and payments infrastructure, the fact is that in the area of capturing transactional revenue and in respect to ownership of consumer mindshare, PayPal reigns supreme. On eBay, for example, between 50-75% of payments are processed via PayPal. Banks like HSBC are proud of the fact that they process much of the back-end payments for PayPal – but surely being in the front-end is the sweet spot here.
Square, from Jack Dorsey (Twitter founder), has recently gone live. All you need is an existing bank account and an Android or iPhone and you can start accepting credit card payments. Currently Square is deployed in the USA where there are more than 20 million small business owners who don’t have a merchant account with a bank. The merchant on-boarding process is just too complex for most businesses, and Square recognized that. What would you rather do? Download an App and sign up for Square, or negotiate the 150 pages of different legal contracts and forms from your bank to set up a merchant account? Banks don’t offer value here – in fact, the opposite.
Disintermediation abounds and is speeding up
This morning at SIBOS we just heard Karen Fawcett of Standard Chartered proclaim
“Transaction banking is now front and centre. Flow businesses that we support are the lifeblood of commerce.”
The problem is this view of the world. Bankers are simply used to owning the pipes, the network, the wires and perceiving that their exclusivity on ‘banking’, their ‘lock on customers’ comes from having a banking license. Clearly, however, disintermediation of the retail front-end of banks is rife. Banks are becoming wholesalers, networks and product manufacturers, but clearly with the lack of innovative capability, the rapidly growing gap between customer behavior and retail banks as poor service companies, the question of whether we need banks has been answered…
We don’t need retail banks – we do need the back-end networks that process payments, we need organizations that are prepared to take on the risk of lending (social lending is unlikely to scale up to mortgage level), and we need mechanisms that give us access to trading systems and markets. But retail banks, their physical distribution real-estate, their products and services are fast becoming redundant. Sure, it will take a couple of decades, but in many ways it’s already too late. The ‘things’ that were uniquely “banking” 20 years ago, today have all been replicated by a transport department, an internet start-up, a social network and a telecommunications company. Banking at the front-end is no longer unique, it’s a commodity. When such interactions become commoditized, then the concept banks leverage of paying for the privilege of banking make them easy targets for disintermediation.