Attacking both flanks: Assessing the real threats to banks
The latest report from The World Economic Forum and Deloitte suggests that tech companies, including the likes of Google and Amazon, represent a bigger threat to banks than FinTech start-ups.
To digest this, we’ve taken a look at both sides of the argument: the reasons why tech companies might be the bigger threat, and why start-ups are the danger banks should continue to be wary of. We then pick a threat from leftfield that banks, start-ups, and big tech companies are ignoring – perhaps at their peril.
As the WEF report notes, banks are becoming increasingly reliant on tech giants for services such as building customer interfaces, cloud storage, or even marketing. Amazon’s cloud computing platform, for example, is being used by firms such as Carlyle, and its voice-activated system, ‘Alexa’, has been picked up by Capital One. Banks are using social media and Google as ad platforms to acquire new customers, but in other, product-driven ways too, with Brazil’s Banco Bradesco letting its customers conduct their daily banking through social media apps.
At the same time, many of these tech giants have begun to show an increasing interest in providing elements of financial services to their own retail customers. Could this be a Trojan horse situation?
Such change is being played out with particular intensity in China where WeChat, the dominant social media app with multiple utilities, is giving prominence to its own WePay payments product over incumbent financial services companies.
Unlike a fintech firm, these technology companies wouldn’t have to build a brand from scratch; they could hand-pick their points of entry into financial services and capitalise on financial institutions’ dependence on them. With cyber security likely to become an increasing determinant of customer trust in financial services brands, the tech-driven reputation of companies like Google and Amazon could be a major advantage.
For now, the relatively low return on equity offered by banks differs significantly from the highly scalable, operationally streamlined models of most tech companies. However the introduction of open banking regulations could make it possible for tech companies to finally bring their high return on equity business models to bear on the financial services industry. Return on equity may also not be the primary objective for tech companies entering the financial services arena. Owning the end-to-end customer relationship provides unprecedented understanding of customer behaviour, wants and needs and would allow the tech giants to expand the range of services they provide in a very targeted and efficient fashion.
There is another side of the coin however.
Banking and financial services are not easy sectors to enter. They carry complex regulatory procedures that need to be managed nationally as well as internationally. They can be capital intensive, susceptible to large-scale frauds, and ultimately pose a major risk to the broader reputation of a multi-sector business. Cool, respected, tech execs might not be keen on their reputations being dragged through the mud should customers feel mistreated. These businesses might decide that the regulatory burden of entering the market is just too heavy to bear.
Whilst new open data initiatives should lower some of these barriers to entry, it is not a certainty that tech giants will shift their gaze toward financial services.
Start-ups have gained huge amounts of consumer trust and loyalty within early-adopter networks by providing more transparent and user-friendly services than those of many of the banks. If these trusted start-ups broaden their offerings to mimic the holistic nature of banks, they could leverage their hard-won reputations and entice customers away from their banks. TransferWise, for example, might be an app for transferring money abroad, but you only have to read their job descriptions to see that they have their eye on a bigger prize. They claim their goal is to be the UK's most popular, most loved and most trusted financial brand.
But it’s a tough slog scaling to be a major, mass-market business. The report from WEF and Deloitte points out that start-ups did not grab as much market share this year as expected. Acquiring customers for traditional financial services products is hard, and convincing them to switch is even harder. Historically, persuading customers to switch over has been a sticking point, even within the industry, with banks often resorting to buying their customers with expensive inducements. Whilst the early-adopter audience might love a better price and user experience, the general public aren’t sure if they can trust unknown brands, and are maybe happy to pay a little more to stick with what they know.
The old adage is that companies need to create a 10x improvement in services for people to switch. Early adopters might move for less, but the bar is pretty high when it comes to convincing mass-market consumers to change their deep-rooted behaviours. Creating a 10x better experience in banking will not be as easy as some start-up founders like to claim.
A leftfield threat
Despite all the buzz around tech giants and start-ups, there is another threat to banks that has been conspicuously absent from this debate.
Price comparison sites.
These companies have done a lot of the hard work already. Brands like Compare The Market and Moneysupermarket have invested heavily in building a reputation amongst the general public. They’ve gathered the regulatory expertise to navigate the complex financial services landscape. And they’ve developed partnerships with a huge range of product providers.
Price is only one reason why customers might choose a financial services product however, and price comparison websites would have to learn how to create the right products, brand and user experience to win the day. Price alone might not be enough.
German company Raisin’s recent acquisition of Manchester-based PBF solutions suggests they might be preparing to make the move from intelligent price comparison website to something closer to a banking service in the UK.
In the open banking universe, price comparison sites could be uniquely positioned to take advantage of increased competition as they gain further access to valuable customer data. In the future, the Moneysupermarkets of the world could own the customer relationship and sit in front of the banks, with the bank relegated to something akin to a financial services utility.
Watch this space for meerkats.