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Digital Disruption: The Challenge to the UK Banking System ...
Wednesday 10th August 2016
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This week the Competition Market Authority [CMA] released the final report on the UK Banking System. Despite fears about digital disruption and the potential “uberization” of the bank network, change is slow to take effect.
The report concludes the smaller, newer, “challenger” banks find it difficult to grow. Older, larger, legacy banks do not have to compete “hard enough” for customers’ business. Switching, the process by which customers change bank accounts from one bank to another is still extremely low. Switching accounts for between 3% and 4% of total current account business.
The CMA would like to see the dominance of the Big Four, HSBC, Barclays, Lloyds and RBS diminished. In 2014 it is estimated the big four, plus Santander, have a combined UK current accounts market share of 85%. Add in TSB, Nationwide and the Co-operative Bank and the total increases to 97%.
For the new challenger banks like OakNorth, Aldermore, Mondo and Atom the challenge is particularly difficult. Despite a strong Fintech mobile platform, Mondo, Atom and Tandem will struggle to recreate, in banking, the success of AirBnB and Uber, in hotels and transportation.
Scaleability is a difficult growth challenge when confronted with customer inertia. In banking, far more is at risk than calling a cab or booking a room. The commitment Life Time Value [LTV] has much more at stake, as clients put their savings, houses and transactions on the line.
Customer inertia, with a switching rate sub 4% will inhibit the growth of challengers whether digital or not. The marketing spend and capital requirements to achieve critical mass, are significant impediments to rapid growth given the market fundamentals.
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So what can the CMA achieve ...?
The
CMA would like to develop an “Open Banking” network. A world in which
customers are able to move accounts more easily and more regularly.
Price and performance comparisons should feature as part of the banks’
marketing profiles.
APIs would be linked to all major banking
systems. Clients would receive reliable, personalised, financial advice,
precisely tailored to individual circumstances delivers securely and
confidentially.
Big data and predictive analytics would enable
cash forecasting to warn of impending overspending. The standards set by the Empires of the Cloud, Google, Apple, Facebook and Amazon are becoming the norm for the banking network.
“People who bought this also bought this, but you can’t afford it - so don’t look at that site again!”
With
Open Banking, apps could use transaction information to find the
current account deals which suit best. Running a small business, apps
could find the best options for business accounts and loans. Apps could
even help avoid overdraft charges by moving cash into accounts when they
dip into the red.
Unfortunately the CMA fails to explain where
the cash would come from. It’s all based on the wonderful world of
fantasy banking. A world in which businesses and individuals never get
into financial trouble. A world in which cash is always available at a
tap of a button. Maybe soon, there will be an app for that. The
“Money-App-tree” may be on the digital horizon but not just yet.
More
choice, more competition, greater market fragmentation, greater product
innovation, disaggregation, right sizing the banks. It all sounds so
easy. Mondo is about giving customers the data and insights into their
spending and saving with warnings of overspend and shortage. But is that
really a sufficient point of differentiation? Predictive capacity may
be a wake up call for the legacy banks but not much more. Big progress
is already being made by the big four and others in the world of
relationship banking. Banks are adapting. Capital One Bank acquired UX
design agency “Adaptive Path” and the App - Level Money - to push ahead in
the digital space.
How the Big Banks will respond ... ?
The
legacy banks have size and experience on their side. They have big
balance sheets and big networks plus experience with the regulators,
retaining the confidence of investors and clients. They have established relationships, data history, data availability, a
spread of products, services, risk management analysis and the scale of
operations to sustain large market shares.
They do have legacy
software systems and architecture which are demanding huge investment to
make the move to digital and mobile. They are responding by developing
startup or VC programmes with FIntech companies, partnering or acquiring
Fintechs or developing resource in house.
Santander’s
Innovation, Barclays Pingit App and Accelerator schemes, Lloyds Digital
Champions, Citibank's Digital Mobile Challenge and Digital
Acceleration teams are witness to the response to the challenge.
Fintechs
will struggle to gain critical mass. The legacy banks will react by
collaborating, competing or acquiring either totally or by partial
investment. Doing nothing is not an option.
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Empires of the Cloud …
The Empires of the Cloud, Google, Apple, Facebook and Amazon are defining
the standards for digital UX user experience and UJ user journey.
Millennium clients are expecting the same standards of service and
response from banking platforms as they are from Amazon and others.
Payment offers easy pickings as a challenge to
the banking network. It is the most vulnerable to digital disruption.
2015 was the year of successful IPOs from PayPal, Square and WorldPay.
The success of Paypal and Transferwise have determined the standards for
ease and speed of money transfers both nationally and internationally. New players like Transferwise may grab the headlines but
Western Union will remain the dominant player in the international
payment market.
Visa and MasterCard remain strong players in the
transaction market. “Contactless” is a great step forward in the
digital age. Google, Apple, Facebook and Amazon all have payment options
with “Wallet” (differential card payment options) as an enhancement.
Facebook paid $19 billion for WhatsApp as an addition to the social
media network. The pattern of payment via messaging options have been
set by WeChat in China. Payment and messages are able to use the same
platform among Facebook’s 1.7 billion users worldwide.
Empires of the
Cloud will be the main threat to the banking system rather than the newer, smaller Fintechs. Apple, Google,
Facebook, Amazon have the relationships and the platforms to disrupt the
conventional banking network. Once the banks are obliged to access with
APIs then the disruption is eased significantly.
Will we see the
Bank of GAFA in the years ahead? An interesting thought when one
considers the combined market capitalisation of the Empires of the Cloud is
$2.5 trillion dollars. RBS, Barclays and Lloyds, each would represent a
modest premium to a WhatsApp deal based on current valuations.
Imagine if the Empires strike back, what would the CMA make of that! |
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