A short, delightful and thought-provoking book with a catchy title, Bye Bye Banks? is an exploration of how retail banks are being displaced, diminished and disintermediated by tech start-ups and what they can do to survive. The book begins with the provocative question: “Could we see the end of banks as we know them in the next twenty years?” and proceeds to explore this.
The corporate playing field has been changed irreversibly in recent years by a new generation of companies and leaders who have torn the rulebook to pieces, adopting new technology, new working practices and serving customers whose lives are increasingly orientated around their mobile phones. New entrants are already challenging the retail banking model and the established brands we all know so well. Traditional banks find it difficult to keep pace with change due to their size and the fact that they still make considerable amounts of money. They also find themselves hamstrung by legacy issues. Legacy technology, legacy processes and, often, legacy thinking. A further challenge is the high cost of compliance, making it hard to deliver change at the pace of the new and agile entrants.
The book starts by outlining the significant drivers of change that impact incumbents in all sectors. The main driver is technology, which is advancing in capability and availability. This, in turn, drives two further factors: consumer behaviour, which is changing as ubiquitous connectivity and channel shifts alter the way we interact with, well, everything; and market competition—lower cost of entry means there are more competitors. In addition, the very low cost of production and distribution means these new competitors can achieve tremendous scale in no time at all. Every aspect of the business model in banking is being unbundled and targeted by a range of VC-backed technology companies with a very strong focus on customer experience.
The new model of payment banks, which have obtained new banking licences and will be launched within the next years, leverages the dramatically lower cost/income ratio that a branchless model offers. Lending the loan book of banks and their loan models are also under threat from person to person.
P2P lenders, now increasingly known as marketplace lenders, have attracted a lot of interest in recent years. There are new models for savings and investments that are offering more transparent pricing and simple, online portfolio construction and management tools supported by a digital operating model. Payments companies are proving vastly attractive to the under-30s, a generation that is mobile-native and sees little need for banks. Money management no longer needs the friendly neighbourhood banker, as personal finance managers help consumers manage their money by collecting all their financial data into a single website or app.
Finally, there is disruption of money itself. The rise of Bitcoin and other virtual currencies, built on a cryptographic system called ‘blockchain’, could radically alter the way financial transactions happen. The cryptography behind blockchain means that transactions can be verified without the need for a trusted third party—a role typically played by a bank.
However, banks are not giving up without a good fight. There are various options that the banks are already pursuing: digital transformations, service and product innovation, and partnering or investing with start-ups. People, culture and technology also need to change. Haycock and Richmond conclude with the recommendation that traditional banks need to reinvent themselves by launching a ‘beta’ bank, a lean, mean, stand-alone organisation fit for the future. The future is mostly virtual banking and their main competitors are tech companies and not other banks.
Banks are under threat from new processes, new markets and developments. Eventually, they must adapt to technology, changing customers preferences and shifting consumer behaviour. This is the message of the small book.
Deepali Pant-Joshi is executive director, RBI. The views expressed are personal