Payments too is an extremely capital intensive business with increasingly enormous scale being necessary to stay ahead of consumer and merchant demand, price competition, fraud and other credit risks.
Even the biggest banks lack that scale – and have recognised that issue for decades. The global payment schemes Visa and MasterCard started as credit products offered by banks which then formed associations of other banks to increase the reach and security of the payment network and the integrity of payment authorisation.
What then does the future of banking hold? In many cases, banks became bigger to manage costs and credit risk as well as seeking new businesses – amplified by globalisation.
The history of the corporation followed similar economic logic: bigger companies could manage the fixed costs of bookkeeping and personnel more efficiently.
Increasingly however the costs of complexity in bigger organisations have begun to outweigh the benefits of scale. Particularly as new technologies have reduced the need for large corporate centres and specialist firms have emerged to offer superior products and management in businesses the organisation historically performed itself.
Meanwhile – and this is hardly recent – waves of non-bank competition have emerged with banking services offered by the likes of supermarkets, tech giants, industrial conglomerates, social networks – and, usually catastrophically – governments.
Banks then are becoming less complex and more willing to partner with non-bank organisations, aiming to better serve more select groups of customers, rather than trying to simply get bigger and offer all products to all customers.
Google is one tech giant with an eye on massive disruption in financial services. A hint of how it thinks can be seen the blurb for an upcoming conference by Google Cloud:
“Google Cloud’s view is that financial services have the most to gain by merging and leveraging the unique data and assets they already possess,” says Google Cloud (which obviously offers these kinds of services).
“By re-imagining themselves as ‘data companies with a banking licence’, banks will have access to previously unavailable innovation; for example, a one-hour home loan, frictionless onboarding and ultra-flexible, customer-centric products. These capabilities will make banking platforms stickier and allow them to provide highly relevant products and services for customers.”
This is a cogent view and it also recognises banks do not have some ontological right to be the only organisations which offer banking services. Just because a myriad of supermarkets, non-bank rivals, governments and fintechs have failed to take over financial services doesn’t mean it can’t be done. Many traditional banks too have failed or been engulfed because they have been unable to evolve.
But the key to the future of banking – which may or may not involve actual banks – is in the final line: successful organisations will need capabilities to make banking platforms stickier and allow them to provide highly relevant products and services for customers.
Take McKinsey & Co’s analysis of one of the more successful start-up banks: “Setting a bold vision, adapting the business to respond to market feedback, and putting customer satisfaction first has enabled digital-banking start-up N26 to grow rapidly into a global bank valued at $US3.5 billion.”
A key insight: “A strong brand and great user experience will be effective differentiators in every market—but local expertise is still required.”
Customers care about what they want the banking process to do for them, not the process itself nor the institution. Shareholders care about investing in the companies which do this the best. But these customers are human, even if they are running huge companies, and they value local - even individual - knowledge.
Andrew Cornell is Managing Editor of bluenotes