UK retail banks are under pressure from regulation, costs and increasing competition. New banks are emerging that are attempting to win customers in the traditional banking market, although often in a niche, and there are technology companies looking to take their own slice of financial services business.
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New banks such as digital-only Atom Bank and German web 2.0-based Fidor Bank are examples of new banks leading with technology. These companies might offer loans, current accounts, savings accounts and even mortgages in the future.
But technology companies are also moving into banking, offering payment and information enrichment services, as well as peer-to-peer lending enablers.
These technology platforms are agile enough to try things out to see if they work and also have enough money to make acquisitions if needs be.
Traditional banking players are taking note. Santander chairman Ana Botín said recently that Apple, Facebook, Amazon and Google are genuine threats to banks. “If you think about the big guys now, it is not the banks, it is these four large tech companies that are worth more than us,” she told the Financial Times. “They have more cash. They have less regulation.”
In fact, banks are more worried about the tech companies than the threat from new banks, according to research by the Economist Intelligence Unit (EIU). The EIU report revealed that 36% of banks think technology companies are the main threat. A total of 21% said non-financial services firms such as retailers were the biggest threat, 13% said new banks and 12% said payment specialists such as PayPal.
With the UK government eager to increase competition in retail banking and consumers willing to try services from various suppliers, now seems to be the time for technology companies to make their move.
In its Why Google Bank Won’t Happen report, analyst firm Forrester said the high costs and strict regulation of setting up a traditional bank – alongside advertising revenue from banks – will push internet firms into roles that support the relationship between banks and their customers, including transactional payment services, financial advice, money management and product comparisons.
These services could be added to their existing platforms and scale would not be a problem for IT companies with their huge processing engines. Facebook has more than a billion users, for example.
In the digital age, there is often a blurred line between when a company is a finance firm or technology firm.
Computer Weekly recently described six challenger banks that are using IT to take on the traditional banks. Here are six IT companies that shaking up retail banking.
Google Bank is already a common phrase in IT and banking circles. So much so that Forrester has compiled a report about its potential.
In recent weeks, Google has increased its footprint in finance. It acquired some of the technology and intellectual property of AT&T Mobility, T-Mobile US and Verizon Wireless-owned mobile payments business Softcard. Google announced previously that Android phones sold by these telcos in the US would soon come pre-installed with Google Wallet.
Google also announced the UK availability of a service that enables people to make payments using Gmail. As part of Google Wallet, the service can be used to send money in the Gmail environment.
The internet giant is also expected to launch payments application programming interface Android Pay at its I/O conference in May. The API will allow developers to add mobile payments to their apps to enable in-store and in-app payments.
In the field of financial services information enrichment, Google recently made available a free mortgage calculator that lets consumers compare mortgages from different finance firms. The free service – available in the Google browser – is a further example of the role technology giants such as Google are carving out in the finance sector.
When Ebay announced that PayPal would become a separate company making its own strategic decisions, it was evidence that payments was a good place to be.
Ebay and PayPal will become two separately listed companies this year after Ebay’s board decided it would not be to either operation's benefit to stay together. Ebay acquired PayPal in a $1.5bn deal in 2002.
The man tasked with making PayPal a giant of financial services, Dan Schulman, said recently that software is eating into the financial services sector and PayPal is at the centre of this. Due to the rise of digital banking, technology companies are increasingly seen as genuine competition to banks and other traditional financial services providers.
PayPal has a large customer base, trusted technology and capital resources, as well as space to grow. Schulman said PayPal could be the world's leading open digital payments platform.
PayPal recently bought mobile payment startup Paydiant for $280m. The startup sells mobile payment software to retailers to enable them to create their own branded mobile payment services. Subway and credit card company Capital One are customers.
In the future, people might say Ebay was part of PayPal, rather than the reverse.
The ease of making secure payments via your iPhone has put Apple on the financial services map.
The Apple Pay mobile wallet, now available in the US, allows iPhone 6 and iPhone 6 Plus users to pay for goods and services using a combination of the mobile wallet and fingerprint authentication.
Speaking in January, Apple CEO Tim Cook said Apple Pay accounted for $2 of every $3 spent using contactless payments across Visa, Mastercard and American Express in the US – where it was launched in October 2014.
This early success has been noted by competitors. Samsung has acquired mobile payments startup LoopPay in what is being billed as a challenge to Apple’s fledgling mobile payments business.
Samsung mobile boss JK Shin said: "Our goal has always been to build the smartest, most secure, user-friendly mobile wallet experience, and we are delighted to welcome LoopPay to take us closer to this goal.”
4. Lending Club
Lending Club is not just about processing payments and providing people with information. Its IT platforms are enabling consumers and businesses that are looking for loans to be matched up with lenders.
Lending Club is a US peer-to-peer lending company. In August 2014, the firm filed for its IPO with US regulators. On 10 December 2014, the company raised almost $900m in the largest tech IPO in the US last year. As of September 2014, the platform had engendered more than $6.2bn in loans.
Financial transactions through online lending platforms in Europe look set to become mainstream, reaching €3bn in 2014 and €7bn predicted for this year.
The UK accounted for three-quarters (€2.34bn) of the total, according to the University of Cambridge research.
UK-based peer-to-peer lending platform MarketInvoice, set up in 2011, buys invoices from businesses through funds provided by investors. The investors receive an agreed percentage of commission when the loan is made and then get the money back when it is repaid.
The government is an investor through the British Business Bank. The bank, established by the government, lends money to small and medium-sized enterprises (SMEs) by buying their invoices and makes money out of it through commission. The Greater Manchester Authority also invests in it to provide credit to local SMEs.
MarketInvoice’s system carries out risk checks on a business with an invoice and then offers its creditors the chance to invest in the invoice, based on the assessment. It can have funds from an invoice available to an SME within 24 hours.
On average, loans are repaid in 40 days and the company said only 1.9% of loans have been defaulted on to date. The average size of the loans it transacts is £65,000.
Since its launch, MarketInvoice has facilitated loans worth £323m to small businesses. But the company is growing quickly, and £200m of that total has been completed in the past year.
IBM could be a wild card in the finance sector. Talk of IBM as a potential candidate to take over UK financial services mobile software company Monitise emerged earlier this year. In January, Monitise said it was reviewing its options, including the possibility of being taken over.
More recently, it has emerged that IBM has held informal talks with some central banks about building an infrastructure to provide them with digital cash and payments systems using the same underlying technology as virtual currency bitcoin.
According to a Reuters report, IBM could adopt the blockchain ledger – which records transactions and is the technology that underpins bitcoin – and apply it to major world currencies. Gareth Lodge, analyst at Celent, said: "I think IBM understand both parts – the technology and the needs. But without getting the requisite central bank blessings, then the work may prove academic."
Future retail financial services could see consumers using providers in multiples of ten. Technology will make it easy to sign up and equally easy to change. The high-street giants that have dominated retail banking might become the scavengers of tomorrow as more agile competitors adapt more quickly to changing consumer and business demand.
"The age of the dinosaurs is over,” said one senior IT source in the UK banking sector. "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.
“I am sure we are at an event horizon with the big banks.”