The financial services industry has yet to experience the digital disruption that radically changed other sectors, such as retail and media. But the influence of the commoditisation of communications, processing power and storage – more popularly known as the internet and the cloud – is going to hit finance too, that much is inevitable and unstoppable.
Arguably, the 2008 crash protected the banking industry from such disruption – increased regulatory scrutiny made it impossible for new entrants and restricted innovation from existing players. But everyone can see the cracks emerging from the lack of digital investment – those ageing, batch-processing mainframe transaction engines at the core of every major bank were simply not designed to handle real-time web and mobile services.
Governments have realised too, that they need to introduce more competition to the market, to reduce the dependence on the global players that let down the world economy so badly.
And what is the one, proven way to increase competition, and break down barriers to entry? It’s technology, of course. Once you could sell online without the cost of a physical store, it transformed retail. Once you could publish content on the web without the cost of a printing press, paper and ink, it transformed the media.
We are seeing the emergence of new, challenger banks based on digital technology, which do not suffer from the complex, legacy IT that the incumbents depend on. Also, banks find some of their services being cherry-picked by the new tech giants – payment services such as Apple Pay, for example, not to mention Paypal. Research suggests more of us will use smartphones to pay for things than credit or debit cards by 2020.
Some banks are responding, of course. Barclays is pushing hard on new mobile services, and even providing training in branches for children to learn coding. Santander is going further, and taking on the cloud suppliers at their own game, offering cloud storage to corporate clients. If data is the new currency, there’s a logical progression to store it with your bank, even if the chances of one bank building the scale of cloud infrastructure needed to compete with Amazon, Google or Microsoft is unlikely.
Banks still control the global flow of money – but trends like Bitcoin are starting to demonstrate that even here, technology can offer alternatives.
The big finance players are vulnerable – even if they don’t want to see it – in the same way as Woolworths, Blockbuster, Comet and others were vulnerable and missed the digital boat. Expect the banks to go through a decade now that will change their industry as much as the last 10 years has done for so many other sectors.