What is it that the banks fear today the most? There are a variety of risks in the global scenario.
If banks faced a perfect storm in 2008, then they are now set to face the next thing up – call it a potential banking apocalypse claims the authors of iDisrupted. In this release we take a look at the multitude of threats that are set to transform global banking permanently.
Existing banks need to radically overhaul their technology while encumbered by an IT legacy. New banks are at an advantage because it is often easier to build a new IT system from scratch, then change an existing system.
Diminishing barriers to entry. Banks used to be supported by their branch network, even by their imposing entrances designed to convey a sense of strength and permanence. New banks used to face a near insurmountable task climbing over such barriers. However, in the age of online banking these barriers have almost entirely collapsed.
The twin threats of IT legacy and diminishing barriers to entry, combined with a sense of mistrust of banks, have afforded challenger banks a unique opportunity.
The Technological Disruption
According to the Millennial Disruption Index, 73% of the millennial generation would be more excited about a new offering in in financial services from Google, Amazon, Apple or Paypal than from their own national bank. This shows that many of the more well known technology companies appear to face an open door when attempting to offer banking services to younger members of the global workforce.
Peer to peer payments work in conjunction with traditional banking by allowing customers to make payments via social media using their existing debit card, but peer to peer payments represent three other disruptive threats to existing banks.
They could bypass existing banks altogether if technology companies put the appropriate infrastructure in place. Secondly, they could have relevance to people who don’t have bank accounts, a problem especially prevalent in Africa. Finally, peer to peer payments and other similar technologies may remove the need for cash altogether.
Peer to Peer Lending and Crowd Sourced Funding.
Existing banks also face threat from the attraction of savings and lending of money. Both peer to peer lending and crowd sourced funding offer new opportunities for both savers and would be borrowers. Even more pertinently, as bankers appear to prioritise lending to consumers over business, crowd sourced funding may well release the log-jam of would be entrepreneurial business held back by the apparent intransigence of their bank.
Lending to Technology Companies
Non-financial organisations also have the advantage over funding more entrepreneurial technology type companies. Firstly, because of potential risk. There is starting to be regulatory crackdown on certain types of loans—particularly those that are highly levered. The argument is essentially that if there is a real chance you won’t be paid back then this is not lending but rather speculation—an unsafe and unsound practice that banks aren’t permitted to do. Non-banks can do this, however.
Banks also need consider the impact of the capital rules on every kind of loan they make so enhanced regulation and technology are arguably converging to drive change, pushing traditional lending from the regulated banking sector to the shadow banking market.
The Threat of Virtual Currencies
Another threat to the banking industry lies in the possibility that new virtual currencies such as bitcoins may evolve, totally disrupting the financial transaction process. Although some central banks, such as the Bank of England have looked into block chain type technology that lies behind the bitcoin to launch a government/central bank controlled virtual currency, the fact is the main impetus for virtual currencies comes from the libertarians. It is possible that governments and central banks may be powerless to stop the rise of independent currencies controlled solely by market operations. After all, a currency is simply an alternative to buying and selling using a barter exchange system. It is hard to regulate against barter, and almost as had to regulate against a new block chain means for acting as a proxy for barter.
In an age, when new technologies may lead to greater inequality and large scale job losses, the ability of central banks to be able to control the money supply and print money when required may be paramount.
But, author John Straw explains that there is still hope for the banks; “The only possible hope for banks looking to survive lies with adopting lean and agile management practises. Banks need to throw out the traditional analogue business way, involving hierarchal structure, minimal experimentation, and a slow cumbersome response to a rapidly changing marketplace, and adopt a more digital type strategy with a more agile flat management structure.”
Although it is far from certain that existing banks can apply such a digital approach, some banks, such as Barclays, are at least applying some of the digital techniques referred to here.
John continues; “Central banks and government need to wake up to the threats posed by new technologies. Many of the new technology led services will represent a positive step, and if the demise of many of the world’s existing banks follows, many might say good riddance.”
But regulators need to somehow manage the change-over. There is a risk of that a collapse in the current banking system to be replaced by a technological led system, could lead to a banking crisis even more serious than the one faced in 2008. The solution to this does not lie in trying to hold technology back, that is as fruitless of as trying to stop the tide, but it does require facing up to these new realities.
The danger that virtual currencies may evolve and remove from government and central banks the ability to control the money supply at a time when technology threaten to disrupt the way the economy has operated for the last two centuries also needs to be faced, or else the dream of plenty that technological revolution can bring, may be replaced by the nightmare of mass unemployment, and unprecedented levels of inequality