Facebook is close to gaining approval from regulators in Ireland to provide some banking services, as consumers crave more choice in the financial services sector.
As more and more financial services are offered by non-banks the stripping down of banks might begin. Banks such as RBS could end up a shadow of their former selves as more nimble competitors eat away at its market share.
According to the Financial Times, Ireland’s central bank is about to approve Facebook as an e-money institution that will allow it to offer consumers the ability to store money and pay others.
Facebook is also said to be considering partnerships with start-ups that offer international money transfer services online and via smartphones.
At a time when traditional banks are unpopular with customers and are being hit by more and more regulation, there is an opportunity for internet companies to take on certain service lines that banks provide.
Banks are also lumbered with legacy IT that makes it difficult to react to market changes quickly and is prone to outages. Large banks such as RBS have been hit by major IT failures lately that have further dampened an already negative image.
The regulators recognise the advantage of a lack of legacy mainframe IT, something internet firms can boast.
Following numerous IT failures, Andrew Bailey, CEO at financial services regulator the Prudential Regulation Authority, suggested that banks would benefit from ripping up and replacing legacy systems. “What would be a very bold thing to do is stripping the machine down and rebuilding it instead of bolting bits together in complex fashions so you end up with a very complex architecture.”
Internet giants do not have the legacy systems to hold them back and are companies where technology is in the DNA. In contrast IT has too often been seen as a cost in banking.
It is not just Facebook. Retail banks could face competition from other internet firms. Consumers use web-based services that are trusted and have good IT. If services such as PayPal, eBay, Amazon, and Twitter moved into banking, they would attract customers. Their systems already contain details about people and businesses and handle transactions and money.
Heavyweight websites could provide bank accounts, said one banking IT professional. "I think banking will change from a few big firms to a multitude of smaller companies in the next few years. I think regulators and governments also want that to happen,” he added.
Recent research from Accenture, of 6,000 consumers surveyed in 11 countries, found that almost a quarter of consumers would consider large internet companies, such as Google and Amazon, as possible insurance providers.
It also revealed that consumers see large internet companies as viable alternatives to retail banks in the future.
Accenture's research showed that 67% of those surveyed would consider buying insurance from companies other than insurers. Some 23% cited online service providers as options.
In Germany, regulators granted a banking licence to a group of entrepreneurs to create a bank that uses the technology to overcome the cost and complexity of traditional banking, while increasing customer trust through an online community.
Fidor Bank, as it is known, is a recognition that because Web 2.0 and social media were changing people’s social lives, they would inevitably change retail banking too.