So, was Bill Gates wrong about the demise of banks?
“Banking is necessary, banks are not”, so stated Bill Gates in 1994. Of course he was only worth $10BN back then, so what did he know? Indeed, some of my banking friends observe that this quote is from 20 years ago and yet their organisations are still around, so he was wrong, wasn't he?
When the Internet first hit the banking world back in the mid to late ‘90s, there was a huge fear amongst the traditional players of being left behind; the old dinosaurs were to be outsmarted by the nimble start-ups, unencumbered by legacy systems and processes. For a while, especially after the dotcom crash, it was easy for banks to become complacent. The Internet was just like the credit card or the ATM – an important innovation for sure, but not one that fundamentally alters business models or how the industry works.
I was reminded this morning by the Financial Times' The Connected Business supplement, that this is no longer true. Across the banking landscape, from consumer to wholesale, alternative banking business models are emerging through a confluence of stricter regulation of traditional banks and connective technologies. Peer-to-peer lending is becoming mainstream. Lending Club, the number one player in the U.S. which issued over $2 billion in loans in 2013, is experiencing triple-digit growth and now boasts such "old school" luminaries as John Mack, Mary Meeker and Larry Summers on its board. Apple, just earlier this month, launched their Apple Pay product, with the aim of revolutionising credit card payments.
In the U.K., Tesco has moved back into financial services in a big way (no jokes please about fictional profits!). Having originally launched loan and credit card services in a joint venture with RBS, Tesco has now brought its own products to market, including a current account, hoping that the new seven-day switch guarantee will drive business its way. Official statistics show that industry-wide in the UK, current account switching is already up 19% this year as opposed to last. Electronic transfers and transactions are reshaping the field of financial services. From mobile phone banking, to digital currencies and crowd funding, new service providers are challenging the incumbent banks with faster, cheaper, more accessible and more relevant services to customers.
Bankers know its coming but will or can they respond?
Its not as if the leaders of traditional banks aren't aware of what is going on. The FT quotes Jamie Dimon as saying, “[They] all want to eat our lunch,” he said back in February, referring to the big technology groups, such as Apple, Google and Facebook. “I mean every single one of them, and they’re going to try.” Banks are spending billions of dollars each year, just to keep their systems running (for the most part), adapt to new regulation and, if time and resources allow, meet changing customer needs. This contrasts with the new entrants, the upstarts, unencumbered by legacy, they are spending virtually all of their intellectual and financial resources on meeting evolving customer needs. Just knowing "it" is coming is often not enough. Look what happened to Kodak, killed off by the very technology they invented - digital photography - as they were culturally and organisationally unable to leave their (hugely successful) past behind them.
Beware: Toxic Orthodoxies at Work
In a number of strategy workshops with banking clients recently, I am struck by the quite alarming degree of complacency. I believe there are two "toxic orthodoxies" (strongly held beliefs that should be challenged) at work:
Banking (retail in particular) is a very sticky product. There are too many barriers and inconveniences so that people on the whole won't move, irrespective of the level of service that they receive. Regulation and the switching statistics both prove this to be false. Facilitated in part by the seven-day switching guarantee, over 1 million customers in the UK changed their bank in 2013.
The upstarts and alternatives are so small, they won't impact the mainstream banks. You just need to look at the "hockey stick" adoption curves of online retail shopping to know how dangerous an assumption this can be. According to a recent article in FastCompany, the next generation of customers are already looking to live a bank-free existence!
So Bill Gates may have been ahead of his time. He may still be wrong. If you are running a bank, are you willing to take that bet?