Banks suffer huge legacy costs: branches are expensive to run
Everybody relax. The banks will not be blown away in a technological whirlwind. The venture capital money being poured into financial start-ups will be wasted, and the UK's peer-to-peer lenders and app-based banks will never take more than a tiny slice of the banks' business. Consultancy Deloitte reckons that, even in the most optimistic scenario, "fintech" companies are unlikely to have more than 6% of the market by 2025.
The report will have given some comfort to senior bankers, and even more to their shareholders, who are nervous that banks are about to go the way of media companies, retailers, travel agents and other traditional industries that have been taken apart by web-based rivals. Deloitte argues that fintech is taking advantage of a "macro-economic fluke" near-zero interest rates have driven investors to look for better returns with fintech firms. But over the long run, there is no evidence that they can manage risk better than traditional banks or that they can offer genuinely better returns over an economic cycle.
In short, the sector has been overhyped, and will crash back to earth soon. Deloitte makes some good arguments. The major banks have well-known brands. Current accounts offer a very low-cost source of funds. The macro environment has certainly helped new players, and it won't last forever. Yet the banks' apparent complacency is risky they face three big challenges, and there is no sign that they are planning to confront them soon.
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First, while the current account is a cheap way of raising funds, banks also suffer huge legacy costs. Branches are expensive to run, there are pensions to pay out and mis-selling claims still demand a few billion every year. By contrast, a website and an app can be run very cheaply and that makes a huge difference to the returns a fintech company can offer, and what it can charge customers.
As for brands, banks' brands are certainly well known, but there is more to a brand than name recognition. The best Apple, British Airways, Waitrose convey some information. The brand says that you're the cheapest, the best, or perhaps the friendliest. The major banks have spent decades ignoring customers, computerising call centres, imposing hidden charges, and mis-selling. Their brands may be a negative, not a positive.
Finally, everything we do is moving online, from our work to our shopping to our viewing habits. When you are getting paid, settling bills, and buying goods online, your connection with a physical bank fades. Apps such as PayPal are increasingly used both for earning and for spending money. As tech giants such as Apple, Facebook, Google and Amazon move into payments, the threat to the banks will keep growing.
To be fair, Deloitte's report is a useful counter-weight to some of the hype around fintech. A lot of flaky companies are being launched, with a lot of venture capital money, but not much of a plan. Yet the report also indicates a dangerous complacency in the banking industry. Where are banks' own online offerings to compete with the peer-to-peer lenders? Where are the investments in start-ups, or the takeovers of those emerging? There is little sign of any attempt to fight back.
As industries from media to retail have learned, once online competitors reach a certain size they can flatten even huge companies fast. The banks are mistaken to think they are immune from that. And to suggest that their tech competitors will never get beyond 6% of the market is surely wrong.
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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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