Breaking through the barricades

I blog a lot about banks needing to change and adapt. I do not blog about the end of banks and I do not predict that banks will be destroyed. I do predict that banks that do not change and adapt will be destroyed, and I do predict that banks that have not fully embraced the change will be severely challenged.

I’m going to write a couple of posts about this.

The first is my own experience in being in banking for too many years. In the last century, we sat in an industry with massive barriers to entry. There were regulatory barriers that required immense levels of capitalisation to get a banking licence and then, if you were lucky enough to get one, you had massive overheads in maintaining regulatory oversight.

There were technological barriers as to set up a bank required huge investments in systems, structures and infrastructures to get off the ground. It precluded most players, apart from the richest, to even consider opening a new bank.

And then there were physical barriers to entry. Most banks believed that their branch networks precluded new entrants and, to a certain extent, that was and still is true. With no physical presence you don’t have the same levels of trust and pure-play digital banks were far and few.

The thing is that all of these barriers have been eroded over time.

The regulators want more competition in banking, especially after the 2008 crisis, and so they’ve brought down the barriers to entry, offered light licences and created sandboxes to mentor start-ups to market in a fast track cycle.

Technology is now cheap, and we have unlimited bandwidth, storage and networking. Cloud, APIs and apps make it really easy to launch a decent bank service in a few months, or even days. A bank-like front-end to 1000 API services could even be built in a day. So, technology is no barrier. Sure, it used to be. It used to be that you had to buy loads of technology at a really high cost to get something up and running and it would take years. Today, it’s fast and almost free. That’s a big technology change.

And then the physicality discussion is also a massive sea change. Yes, it used to be that customers wanted a physical presence and yes, some still do. But we are becoming so comfortable with our devices and apps, that it is not a pre-requisite. As a result, the banks that have high physical infrastructure costs are finding pressure from those new services that have no physical cost. The ability to launch a pure digital play and offer 200 basis points better differential between debits and credits becomes quite compelling in an age where banks are disliked immensely, and price sensitivity is at an all-time high.

In other words, all of the things that used to provide comfort to banks as barriers to entry – regulations, technologies and physical structures – are now the bane of banks’ lives and are the overheads to compete. The challenger banks with no legacy, regulators support, highly efficient cloud-based services, curating a marketplace of APIs with zero physical overhead is becoming a serious consideration.

Therefore, I may blog that the banks don’t feel the FinTech fire yet … but they will, unless they adapt to survive which, luckily, most are. Are they doing it fast enough? I’m not sure, but at least they’re trying.