We sometimes hear people say that an “Apple Bank” or “Google Bank” could knock out traditional banks overnight. Is that really possible?
I think a knockout is absolute nonsense, but those parties definitely have capabilities to win in the long run. Remember, banking is complicated. Through history, we have seen many examples of new actors entering new markets and failing. It is probable that new entrants will gain profitable business in specific segments over time, but they will need to work hard for it!
Banking is a scale business, and even though modern IT and new business models allow for profitability with a smaller customer base, you still need a large customer base to succeed. Tough demands on competence, bank-license, compliance etc., also create a threshold, and this is as it should be. Banking is about trust, and bankrupt banks create many more problems for an economy than bankrupt flower shops or shoe stores.
So, existing banks have strengths, like their existing customer base, existing processes, bank-competence, trust and funds to invest in innovation. In addition, the market — a rather non-transparent oligopoly with quite a high threshold for entry; legislation supporting non-transparency; and, finally, quite high thresholds to move to a new bank — is very favorable for existing actors.
Weaknesses for existing actors are their especially heavy IT legacy systems (which are costly and problematic to provide new functionality) and a “fat & happy” mentality (the difference between maintaining a business rather than developing one; an unwillingness to cannibalize on an existing profitable model; employees that are competent but not creative innovators, etc.).
The strengths of new actors are the lack of IT legacy; strong venture capital market for fintechs presently; an innovative, creative approach; and they can also choose to cherry-pick profitable parts from the banks, like payments, mortgage, etc. The weaknesses for new actors are lack of trust and bank skills (yes, you need that for banking), quite high hurdles for bank license and, perhaps the biggest weakness, the lack of customer base.
We have a third group of actors, though, which might be best equipped to disrupt the current business-model: existing industries that extend into banking.
These businesses have funding, organization and skills from their own domain. They are not “fat & happy” in banking but rather creative and innovative, and they can leverage their own industry knowledge into banking.
This could be a tech company like Apple or Ericsson, but also foreign banks entering new markets using existing “backbone” from home markets, but with digital marketing and digital distribution in the new market. I regard these “x-border banking entries” as the biggest threats to existing actors.
This was a short high-level view on the players, strengths and weaknesses in today’s banking industry. For more in this series, check earlier posts about the change in back-end tech and the change in front-end tech for banking.
My next post will deal with the really interesting part: the change of the ecosystem.
As a Client Relationship Executive in Banking at CSC, Patrik Merup helps clients to link business challenges and opportunities into IT solutions. Patrik’s expertise is retail banking after 20+ years in a variety of roles in the senior management team of three different retail banks before he joined the IT supplier side of banking. Patrik has MBA degree from Stockholm School of Economics and Stanford University and lives with his family in the Archipelago outside Stockholm, Sweden. Connect with him on LinkedIn.