Today, an increasing share of global economic activity involves cross border transactions. According to the latest McKinsey reports, in 2016 cross border electronic payments are expected to account for 81% of the value of all global payments flows. That’s an increase of 16% in a decade - up from 65% in 2006.
In the era of the networked society, it’s no surprise that we want payments without borders. Indeed, this societal shift has accelerated innovation in the payments sector and will continue to drive forward changes that carve out a different banking landscape.
The next five to ten years will see the creation of a single global online marketplace, thanks to developments in technology. This digitalisation will bring greater levels of cross border commerce, with new digital payments platforms allowing for more individual participation in global flows than ever before. But how are the incumbents reacting to this opportunity – and how will they respond in the future?
Incumbents often believe they have an insurmountable wall protecting them from any major shift, but the reality is that it is getting harder to maintain those walls.
Analysis reveals that in the 1960s, the lifespan of an average company on the S&P Index was 60 years. By the late 1990s this had dipped to under 20 years, with the last peak of 25 years hitting at around 2000. In 2016, projections put lifespans at around 19 years, dropping to around 15 years by 2025. This downward trajectory is likely to accelerate, as the pace of technology adoption increases.
What does this mean for the incumbents? They need to rethink to compete in the digital age.
The traditional banking sector may think it’s got time to make a change, but the reality is very different. Way back in 1985, when Microsoft launched Windows, its ‘march to a billion users’ took nearly 26 years. Fast forward to the arrival of Android in 2008, which has reached a billion users in less than six years, highlighting how quickly the landscape shifts, as technology creates new opportunities.
To succeed in this new digital market, banks need to enter the global digital battleground. The current landscape (see fig. 3) offers traditional bank accounts, but the new generation of consumers and businesses is looking for more cost effective and innovative solutions to do their banking.
Most non-banks are specialised within the digital space and these fintech newcomers are challenging the status quo. They can approach the financial market with new products because they have no legacy and can be highly flexible. As a result, traditional banks will most likely become more relationship driven and focused on customer relationships. Fintechswill also enter the digital battleground due to regulations such as the Payments Directive opening up the market and paving the way for them to do so.
But the fintechs of today are not the only threat to the incumbents. Indeed, a third group is now entering the digital battleground and they not only pose a threat to the banks – but to the current swathe of fintechs too.
It surely can’t be too far-fetched to imagine lending money via Google or handling wealth management via Facebook? And will the ‘Internet of Things’ give marketplaces like Amazon and Alibaba an advantage, as the new global financial marketplaces for banking and finance? And how will crypto currencies and the technology behind them impact the evolution of the infrastructure underpinning the banking industry?
Looking to the future
In the future, the new digital battleground will feature banks and a whole host of other players competing for business and consumer clients. And they will all be focused on the overall customer relationship.
Currently, both tech and fintech business are trying to unbundle the big banks. But the banks aren’t sitting back and letting the start-ups attack their previously well-defended markets. The major banking giants are taking proactive steps to protect their dominance in payments, wealth management, and billing by entering the fintech space.
For example, BBVA the Spanish banking giant, has been very proactive in the financial technology sector. In February 2015, it bought Simple, a rapidly growing US digital bank that allows customers to conduct transactions through an app. In October 2015, BBVA also announced a partnership with Iowa-based Dwolla, a company that allows users to process faster payments, as an alternative to traditional wire transfers. And in November, BBVA acquired almost 30% of ATOM bank, the UK’s first digital only bank, in a deal worth £45m. It has also just recently announced its acquisition of Holvi, an online bank that caters to entrepreneurs and tech start-ups.
But BBVA isn’t the only big bank on the offensive. A further six major banks — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo — have all made strategic investments in 30 FinTech companies, since 2009, according to CB Insights data.
So who will be the winner in 2020?
It is very difficult to predict who will win the digitalisation battle because technology moves quickly and the market moves with it. If the banks are to come out on top, they will have to use the many tools at their disposal. Tier two and tier three banks will most likely become more relationship driven and focused on the customer relationship, while outsourcing non-core functions such as lending, FX and cross border payments to “utilities”.
Fintechs will keep gaining market share, but will likely meet increased regulation. And larger tech giants like Apple, Google, Facebook and Amazon will increase their efforts to gain market share within the FinTech market.
By 2020, the banking industry is likely to be more fragmented, but the different ways of delivering “banking services” will be broader than we see today. And, crucially, the unbundling of the banks and increased innovation will ultimately benefit customers, making them the real winners.
By Anders la Cour, Chief Executive Officer, Saxo Payments.