Technology take-off threatens bank foundations

Helen Avery
Published on:

Paypal can make your payments. Google wants your wallet. Facebook sees what you like. Apple and Amazon know when you spend and what you spend it on. How far can the new, powerful technology companies threaten the traditional role of banks?

Who is the biggest threat to your bank at the moment? It’s a question posed to the chief executive of one of the largest global banks. Without a pause he replies: "Google. Our peers I can handle. We’re in the same boat. But if Google opens a bank, with all their data – then we’re in big trouble."

For now, he is safe. Under US law, not Google, Amazon nor Facebook (the second most potent threat listed by bank executives) can go into the traditional business of taking deposits and neither have plans to do so.

But the bank CEO knows all this. What he means is that things are changing in banking globally. It is no longer a static playing field made up of credit card companies, banks and niche loan/money transfer companies whose behaviour is predictable. Since the credit crisis, and with the explosion of social networks/the cloud/online technology, an increasing number of alternatives to traditional means of finance have emerged. This emergence of nontraditional players has been fast, and lines plotting growth rates in technology are steep. The annual growth rate in mobile payments, for example, is running at about 95%.

The CEO also knows that banks are losing a traditional advantage. The mantra in retail banking has always been: "Know your customer." Banks had a unique view of the spending patterns of their clients. Online transacting, and new technology, is eroding that advantage.

"Banks are seeing their turf being attacked from multiple directions," says Samantha Ghiotti, director of Anthemis Group, a consulting and investment firm focusing on financial services innovation. "Mobile network operators, supermarkets, department stores, payment platforms, new joint ventures and start-ups. Even where bank regulation is tight and licences are closed, such as in the US, there are alternative ways of getting into banking. Being a traditional bank is not a happy place to be right now."

Indeed there does seem to be disruption on every level of financial services. Google and Facebook might not be planning to start banks, but they are active in payments – an area that firms such as PayPal and Skrill have already shown to be ripe for expansion. Google has Google Wallet. And Facebook could conceivably expand the payments system that it uses to connect its developers with paying customers.

In loans, alternative providers are springing up across the globe driven by the model of crowdfunding – sourcing loans from individuals or investors online. Tired of being turned away for personal or small business loans, and disheartened with high credit card interest rates, individuals have rallied together online to provide loans to one another at more affordable rates to borrowers and higher interest rates to lenders than from bank cash deposits. More than $1 billion in loans is expected to have been made by the end of this year.

In Europe, where banking laws are less restrictive than in the US, non-banks such as retail outlets are starting up or expanding their banking offerings. Brands such as Marks & Spencer and Tesco are moving into mortgages and even deposit accounts.

Even in trade finance, an area dominated by banks, the cloud and e-voicing is transforming paper into data and new technology platforms such as Tradeshift are becoming a popular trade-financing model for businesses.

Nowhere is this phenomenon more pronounced than in the world of payments.

The growth of the internet has transformed how people shop and transfer money commercially and between peers. It has also broadened everyone’s ability to make transactions beyond national borders.

It is an area that banks and credit card companies should have owned, but alternative means of transacting have been able to creep into the global payments market as banks have been unable to keep up with technology. Firms such as PayPal and Skrill have created a new industry of online payment systems, and other firms are following in their footsteps, such as Google Wallet. Forms of non-cash payment have also sprung up, such as e-vouchers or prepaid cards. These players own some $135 billion of the online payments market.

The move to paying with a phone  
Estimates of global volume of mobile payment transaction 
Source: Anthemis Group 

A look at the broader figures, however, shows that banks are under little threat financially from these new entrants for now. At present $300 trillion-worth of non-cash transactions are made globally a year, says Anthemis Group’s Ghiotti. Only $35 trillion of that is in consumer payments. The rest are wholesale corporate payments between businesses or banks.

Of the $35 trillion in consumer payments about $33.7 trillion is by physical consumers going to a store and paying with a card. The remaining $1.3 trillion is online payments. And of those e-payments, $1.2 trillion-worth is executed through some form of bank provider operating in the mix. That leaves $135 billion in non-bank transactions."Are the non-banks eating into the banks’ or credit card companies’ lunch?" asks Ghiotti. "When you put the figures in context you see no, not so much. But the emergence of alternatives to traditional bank services and methods of payment is changing the industry, and those changes are accelerating. Banks are slowly waking up to how they are going to be impacted as the non-bank share continues to grow."