Fintech will breathe life into British banking
Joe Wright, 1 July 2015
British banking has escaped disruption or any real dose of creative destruction for an astonishingly long time. Even after the financial crisis, five banks continue to dominate the financial market comfortably. Their size allows them to make mistakes (e.g. miss-selling PPI) with little real market repercussions. Battered reputations and low customer satisfaction rarely impact business, and despite progress in consumer products such as internet banking and the slow adoption of mobile banking, the big five still offer pretty much what they have always offered and at familiar prices.
A new report by the World Economic Forum, however, predicts that this all changing. Fintech – financial technology – is growing apace, developing new digital technologies to challenge traditional banking. Industry experts are comparing the rise of Fintech to the digital upheavals in the travel and services industries created by the companies Uber and Airbnb.
The introduction of bank portability, whereby customers wait only a week to change banks without needing new account details, was an attempt to increase competition. Fintech companies are far more effective. They look to challenge banks on individual services rather than offer customers a complete banking experience. It allows them to look at areas where banks are poor and better them. To illustrate, Lending Club offers fast personal and business loans with lower interest rates than traditional banking simply by offering a platform to connect investors and borrowers.
Atom Bank, granted a banking license by UK regulators only last week, offer an entirely online experience (‘banking without bricks’), meaning constant access and convenience for customers. It promises ‘better systems, better processes, better policies and better people… and low cost’ in a bid to show it is a clean break from traditional banks.
A repeat problem during the years of stagnation after the financial collapse in 2008 was getting banks to lend to small and medium-sized enterprises. The worst cases involved RBS and Lloyds which were accused in 2013 of deliberately causing solvent small firms to fail in an attempt to seize their assets at knock down prices. Companies like Amazon are challenging traditional banks in these markets; it announced plans this week to begin lending to small businesses that sell products or services on its site. Ebay’s PayPal division began a lending service last year.
Fintech is affecting all manner of financial services. The US company Estimize aims to create better and more transparent company performance estimates than traditional banks by crowd sourcing data. According to its website, 70 per cent of public companies in the US consistently beat their Wall Street estimate each quarter. They argue this is due to a Walls Street bias or group think mentality. Their website allows more than sell side experts to contribute their predictions.
Seven years after the financial collapse, banks’ investment and retail operations will most likely be ring-fenced by law, as proposed by the Vickers report. Along with a healthy dose of innovation from Fintech, Britain’s financial sector may once again be in rude health.