2015 for banks: a year of metamorphosis

I was surprised in 2014 by how many banks started to get the digitisation message, and this will snowball in 2015.  Already we see big changes, with banks such as Lloyds and ING stating that they have to change massively to reduce costs, lay off staff, close branches and move their investments towards digitisation.  Alongside this, bank CEO’s such Antony Jenkins at Barclays are saying that the global universal banking model is dead and that banks must embrace technology change fast or lose out.

Obviously I agree with this, and see it as more fundamentally a shift to embrace the digital bank business model of component-based financial services integration.  This is the theme I explored and developed throughout the last year and this will continue at a pace.

It’s just a matter of the numbers.  The numbers speak for themselves.  The numbers I’m talking about is the amount of money being ploughed into fintech start-ups to disrupt the incumbent space.  No one knows the exact numbers, but we know it’s billions of dollars.  Billions of speculative investment in the fintech bubble that may burst but, when it does, there will be some amazing new players as heavyweights sitting there as a result.

Heavyweight potential players are already emerging – just look at Tencent and Alibaba in China or Apple Pay and Facebook’s financial dalliances to get a sense of what we mean – but there will be more than this.  The alternative credit market is already a strong viable alternative to traditional banking, with P2P lenders becoming a mainstay choice for small businesses and consumers.  The nature of the industry itself is being restructured through technologies, with many banks now looking at the blockchain from Bitcoin as a critical part of reducing costs and creating trusted value exchanges through smart contracts.

This will continue through 2015, and so here are five predictions for the year.

China will lead the way

I’ve talked about the weaknesses in China’s economy, but not enough about the strengths.  A critical strength in China’s economy is an ability to innovate and leapfrog over what has gone before.  China’s innovators are unencumbered by the legacies of their Western counterparts, and not only have we seen China Union Pay and Alibaba/Alipay providing us with insights that go far beyond those in the USA or Europe, but equally firms like Tencent, Weibo, YY and more are creating innovative new structures of finance.  I am continually amazed how little of these innovative new models are reported in Western media, with the latest being the launch of a new bank by Tencent this week.  This follows on the massive flow of funds to Alibaba’s bond last year.  Then we also have interesting things happening in ICBC, China Construction Bank and the Agricultural Bank of China.  These are now the biggest banks in the world, and I think we here in the West spend far too much time looking for innovation from the likes of Silicon Valley and not  enough from Zhongguancun.

SWIFT will move from messaging to resilience

For many years at SIBOS, we’ve heard SWIFT bang on about how many messages they move over the network, the move into capital markets messages competing and then partnering with FIX, the ability to use SWIFT for more than just payments, etc, etc.  This year, I think SWIFT will move away from payments, transactions and messaging to a bigger focus upon resilience.  What I mean by this is not just fault tolerance and uptime, but resilience of the SWIFT architecture to provide banks with confidence in their messaging.  This was first indicated by SWIFT’s sanctions testing capabilities to ensure that banks don’t fall foul of US authorities when dealing with third parties.  That was extended by the launch of the SWIFT KYC services last year.  And it will continue through 2015 and beyond as SWIFT place more focus on identity management, risk management and the integration of multiple checkpoint services around messaging.  In other words, SWIFT’s value is in its ability to provide guarantees to banks that by using their network and their infrastructure, their members have complete confidence in compliant transactions and cross-border activities.  That’s where SWIFT’s real value lies today, not as a payments or messaging network – Bitcoin could be that – but as a resilient network we can have confidence in.

PayPal will get uber-aggressive in Transaction Banking

PayPal is a processor that sits on the banking system and changes nothing in the banking system.  It was attacked by minnows like Square, and beat back with APIs and PayPal Here but PayPal has to go further, especially now that they are leaving their mothership eBay to become a true, fully fledged and independent payments processor.  As a payments processor, PayPal make their money buy being the de facto standard for net-based payments and adding a fee for the convenience on top.  That is the model that will now change and adapt and is the reason that PayPal, like most financial institutions, are starting to look fundamentally under the hood of the Bitcoin blockchain to see what it could do for them. I would be surprised therefore if, in 2015, PayPal didn’t reinvent itself as the low-cost payments processor for the internet of things, rather than being the sit-on-top-of-the-cost payments processor for the internet.

More incumbent banks will launch digital bank brands

I am surprised this hasn’t happened yet, although some may say that NAB with uBank was the first example followed by BNP Paribas with Hello!  The large incumbent banks are all now messing with adapting to digital but many now see that it would be easier just to start from scratch with a new digital bank brand.  Just as Midland, now HSBC, launched First Direct to deal with call centre remote banking, many of the incumbents will feel it’s better and easier to launch a cool new millennial gathering firm than trying to attract them to the boring old banks of the last century.  My bet is that one of the large American banks will be the first mover in this pace, but it wouldn’t surprise me if it even came from a sleepy old European bank.

Banks will face more competition than ever

Banks are seeing new fintech start-ups nibbling away at every aspect of their business, but they are also seeing regulators encouraging new bank start-ups to nibble away at their core business.  This is evidenced by the FT this week, showing that the regulator is actively working with 26 new bank start-ups to get them up and running, with four already being processing including Atom Bank and Starling Bank who will both be making an appearance on this blog later this month.  What this means in reality is that the old bank model of tight control through vertical integration has finally been broken apart, and why it is imperative that the old banks build a new model to provide open source horizontal integration of third party services to deliver the best bank for the buck.

So there are five not too wild ideas for 2015.  Anyone have any more to add?