Tech-tock, the tech clock is ticking

Private-sector bank accounts could be obsolete in the next decade, according to Australia’s chief corporate regulator. Instead, central banks would offer accounts using digital currencies.

The Bank for International Settlements – known as the ‘central banks’ central bank’ – says the rapid adoption of financial technology or ‘fintech’ and the emergence of new business models pose an increasing challenge to incumbent banks “in almost all the scenarios considered”.

The World Economic Forum meanwhile warns it is not so much fintech but Big Tech like Amazon and Facebook which pose the greatest existential threat to the banking world.

"Of what there can be no doubt is financial services is being radically transformed.” - Andrew Cornell

Each argument is cogent. Yet for each a counter argument can be made. Greg Medcraft, the chairman of the Australian Securities and Investments Commission, argues the combination of digital versions of traditional fiat currencies coupled with market-based lending removes the need for traditional financial intermediaries like banks.

Central banks themselves are not so keen, to date they have limited themselves to discussions of the impact of such currencies and supervisory issues.

And history tells us humans are very reluctant to give up traditional practices – whether the paper cheque (obsolete for almost two decades but still in use) or the Japanese One Yen coin (literally useless and costing more to produce than it’s worth).


It is true, as the BIS argues in its paper Sound practices: Implications of fintech developments for banks and bank supervisors, that fintech innovation spans almost every aspect of banking. But to date where these technologies have had most cut through is when they have partnered with or been bought by larger incumbents.

The WEF report Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services suggests the combination of ‘open data’ regimes will weaken banks' control over data by allowing customers to share it with third parties.

Data being moved into the financial cloud via the likes of Amazon Web Services will drive banking competition in the coming decade the forum says.

Yet already we are seeing both regulatory and political pushback against such borderless data and growing concern in the community more broadly about data privacy. While banks in aggregate – particularly in Australia – may have a trust deficit, individual customers still trust their particular bank to a high degree to be a custodian of sensitive personal information.

Incumbents are hardly deaf to the threats emerging although it’s true there’s a huge disparity in readiness and willingness.

For example, research from the Harvard Business Review and Genpact Research Institute called ‘Accelerating the pace and impact of digital transformation: How financial services views the digital agenda’ highlighted ongoing challenges in the sector, notably an inability to experiment or the burden of legacy systems and processes, preventing the effective use of digital technologies.

Less than half of financial services sector respondents said their companies have a clear, enterprise-wide digital strategy. Leadership was a critical issue with too much fragmentation and reluctance to abandon existing structures, according to the survey.

But equally there are financial services companies who no longer even see themselves as such. Goldman Sachs chief executive Lloyd Blankfein says flat out “we are a technology company”. JPMorgan Chase’s chief financial officer Marianne Lake uses exactly the same words.

One of the authors of the WEF report, R. Jesse McWaters, Financial Innovation Lead at the WEF, says “incumbent financial institutions have been able to catch up faster than many expected, treating the proliferation of fintechs as a supermarket for capabilities that allow them to use acquisitions and partnerships to rapidly deploy new offerings”.

Regional approaches may differ and institutions have different approaches. Some banks, particularly some of the large US ones, have dedicated venture capital subsidiaries investing in fintech. Others participate in consortia. Or various market places.

Stone & Chalk

For example, here at ANZ the bank is a corporate sponsor of Australia’s largest fintech hub, Stone & Chalk, with chief executive Shayne Elliott on the advisory board for the hub’s Melbourne offshoot.

ANZ is also a foundation partner for SheStarts with an accelerator program via BlueChilli. According to the venture capital analysis group CB Insights non-technology companies now invest more in technology than tech companies.

In the firm’s recent report into fintech investments by major US banks, six - Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo — have made strategic investments in 30 fintech companies since 2009.

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In its accompanying social chart, CB Insights identifies considerable overlap between the banks. The same start-up or fintech may be backed by multiple banks and large banks obviously may invest in multiple approaches to a fintech opportunity.

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The key sectors banks are investing in – and this is true across the globe, to differing degrees – are payments, data analytics, personal technology, distributed ledgers and/or digital currencies and peer-to-peer lending.

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Notably, while all these sectors are currently core or near-core business for incumbent, diversified banks, no fintech or start-up covers multiple business lines.

The threat from Big Tech as opposed to fintech comes from a different flank. Like major banks, these firms have the capacity to invest in or hoover up multiple start-ups – or indeed, as is the case with Amazon, buy banks.


This is the front the WEF report focusses on. The WEF analysis makes the point fintechs themselves don’t have the scale to influence markets.

“While financial technology firms have been driving innovation and inspiring others, they have also been failing to capture significant market share,” it says. The tech giants have scale.

In the anglophone world and western economies we tend to focus on the FANGs – Facebook, Amazon, Netflix, Google – and their like but the WEF reminds us the Chinese influence is potentially even greater.

Chinese tech giant Tencent's Webank platform, which allows retail customers to purchase products from multiple competing credit and asset management providers, is the digital equivalent of a universal bank – but even more universal.

Jack Ma's Alibaba group via its Alipay mobile payment app – based around QR code technology almost forgotten in the west - now owns over 50 per cent of the $US5.5 trillion Chinese mobile payments sector.

A contributing expert to the WEF report, the payment doyen Chris Skinner, makes the point “fintech hasn’t changed much … yet”.

The point is fintechs represent only the first wave in a series of disruptive forces that will likely shape the future of the industry.

“Fintechs have changed the pace of innovation and reshaped customer expectations across the financial services ecosystem, laying the foundation for future disruption in the industry,” said Rob Galaski, partner, Americas FSI Regional Leader, Deloitte Canada, a co-author of the WEF report.

“The success of fintechs in changing the basis of competition, as well as the increasing pace of technology, means that incumbents have the potential to improve rapidly - but also face rapid disruption going forward.”

WEF identified some key fronts for disruption: platforms which provide consumers with multiple banking options, likely building on open data; greater regionalisation – echoing the broader anti-globalisation mood, demanding more national models and making it harder for fintechs to go across borders; greater dependence by banks on Big Tech – for example cloud-based infrastructure – even as those enterprises become greater competitors.

No doubt

Of what there can be no doubt is financial services is being radically transformed. The tech challenge is but one dimension.

Banks have benefitted from a three decade bull run for bonds – and banks make more money as interest rates fall. Equally banks were delivering returns on equity in the 20s before the financial crisis when the risk free rate of return was about a quarter of that.

While today the risk-free rate is miniscule, globally banks struggle to post ROEs in the double digits. Hence there is enormous pressure to reduce costs. New revenue streams of course would be welcome but the pressure on costs and customer ownership is paramount.

Those who own the customer – or, more to the point, those with whom consumers choose to have a primary relationship – will have higher margins than those just providing back-end services or product manufacturing.

As the WEF report says: “As financial institutions seek new advantages to grow their competitive footprint, they will be left with tough choices: become dependent on large technology companies or risk falling behind on technological offerings if they minimize engagement to protect independence.”

The World Economic Forum’s systemically important techs

Cost Commoditisation: Financial institutions may aggressively commoditise their cost bases, removing it as a point of competition and creating new grounds for differentiation.

Profit Redistribution: Technology will likely enable organisations to bypass traditional value chains, thereby redistributing profit pools.

Experience Ownership: Power will likely transfer to the owner of the customer interface; pure manufacturers must therefore become hyper-scaled or hyper-focused.

Data Monetisation: Data may become increasingly important for differentiation but static datasets will likely be replaced by flows of data from multiple sources combined and used in real-time

Bionic Workforce: As the ability of machines to replicate the behaviours of humans continue to evolve, financial institutions will likely need to manage labour and capital as a single set of capabilities.

Andrew Cornell is bluenotes Managing Editor

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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