The banking industry generates in excess of $1 trillion profit per year - the kind of profit that tech startups would obviously love to get a piece of. It is, however, possibly the industry most resistant to technological disruption. Since the first mortgage was provided in the UK back in the 11th century, walls and systems have been built up to help protect them from anything that would shake things up too dramatically. The last period of real technological upheaval - the DotCom boom at the turn of the millennium - brought little change for banks. During the eight-year period between the Netscape IPO and the acquisition of PayPal by eBay, over 450 companies attempted to enter the market with new financial services innovations. Less than five of these survive today.
It appears that the situation is changing, though. Technological advances and evolving consumer behaviors are providing tech companies with cracks to exploit while banks - slow to adapt because of their outdated structures and the increase in regulations since the financial crisis - fall behind. According to the best estimates, Asia currently has approximately 2,500 FinTech startups operating, while the UK and the US have 4,000 combined. According to Citigroup and consulting firm CB Insights, investment in private FinTech companies increased 60% to $19 billion during 2015 alone.
This is, of course, a good thing. FinTech startups have created business models far better suited to the digital age, providing the necessary agility and innovative culture to best serve customer needs efficiently. According to Julian Skan, managing director in financial services at Accenture, ‘Digital disruption has the potential to shrink the role and relevance of today’s banks, and simultaneously help them create better, faster, cheaper services that make them an even more essential part of everyday life for institutions and individuals. To make the impact positive, banks are acknowledging that they need to shake themselves out of institutional complacency and recognize that merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence.’
The most pressing issue confronting banks is how to deal with disruption. Banks are more constrained by legacy systems than FinTech firms, which greatly stifles innovation and the ability to be agile. Attempting digital transformation is necessary, but is it achievable for such unwieldy institutions to do it? At the moment, many banks seem to be flailing about desperately, starting as many open innovation programs and accelerators as possible, but they lack any real direction. HSBC, for example, hired 2 former Google employees, which looks great in the press, but hasn’t really changed anything fundamental enough for you to say they’re anywhere approaching digital maturity. Increasingly, banks are finding that it’s easier just to acquire or partner with FinTechs and bring them in house, BBVA’s acquisition of 30% of Atom is a prime example. Ultimately, however, the culture and the conventional operating model at the banks remain the same, and this prevents real digital transformation. They've invested heavily on the front end - attracting millennials, developing point-of-sale capabilities - but the back end is still years behind because they lack the infrastructure, staff and management. Traditional retail banks are like oil tankers with aspirations to become yachts. What they need to do is take themselves apart, rebuild, and throw away all the waste. What they are doing is sticking a few sails on top and calling themselves yachts in the hope that people will believe it.
The ramifications of this could be severe for innovation in banking and destroy the potential of FinTech. FinTech firms, particularly in the UK, have a tendency to sell early, and the danger is that banks, because of their inability to really do digital, will actually hamper their growth. FinTech startups dazzled by the big money being offered to them should be wary of the consequences of selling out too soon and think hard about whether it is really the best option, as ultimately it will be the customer who loses out.