Castles & Mobile Homes – The Fintech Revolution
A recent study by Accenture on the banking industry structure in Europe reveals that 17 percent of the market players in 2017 had joined the market since 2005 and that they are now responsible for one-third of revenue growth across the region. The most prominent case is the UK, where 63 percent of players in the UK are new entrants. Given the UK’s position in financial services worldwide, this is significant.
These new entrants have captured 14 percent of total banking revenues, with the majority (12 percent) going to non-bank payments institutions. It is ever so quietly a very significant shift.
The critical driver of this change is technology, which is both facilitating new businesses and social change in the way that consumers and businesses fulfil their financial service requirements.
The findings of the Accenture research represent a classic example of the continuous rise and fall in big business fortunes since the Industrial Revolution that remains very much part of our world today. The established and substantial ‘castle’ banking businesses, whose sheer scale may have appeared to make them impregnable and whose strategic importance to countries saw some notable players having their walls shored-up during the credit crisis, seem increasingly less necessary. New alternative financing structures are emerging and people like them.
Big Dogs No Longer Own the Streets
In July 2006, Time Magazine published an article on what it saw as the new business rules. The first of these was:
- Old Rule 1: Big dogs own the street
- New Rule 1: agile is best
It was very prophetic.
Perhaps the ultimate evidence of the issues facing the castle businesses is General Electric (GE). As recently as 2014, the conglomerate’s GE Capital and GE Money financial service businesses had 35,000+ employees worldwide, saw it operating in more than 40 countries and hold assets of US$499 billion. Just three years later, most of the business had been sold or closed down.
This summer, GE’s fall from grace saw it fall out of the Dow Jones Industrial Average. It brought to an end a connection that dated back to when Charles Dow and Edward Jones selected their first ever 12 stocks in 1896. History is littered with evidence that demonstrates major businesses fade and some disappear entirely; financial services is far from immune to this reality.
In financial services, traditional castle businesses may point to a lack of innovation from the ever-growing challenger financiers, but this is to miss the point. Amazon is not selling anything new to customers, but they are selling it differently by following New Rule 1 – agile is best. Packaging and distribution are at the heart of their growth – it is about creating a better, more appropriate buying process. This is the same for the fintech financial businesses, who are a ‘mobile home’ when compared to a castle.
As a ‘mobile home’ financer, the emerging breed of financial challenger businesses can move quickly and are seen as accessible and informal. They are in touch with the way people want to access their financial needs. They often choose to operate in niche markets bringing sector expertise when and where that audience wants it. Finally, these new starts are free of the legacy systems, cultures, technologies and traditions, that often hamper established organisations.
Our own experience at Copernicus marks this last point out. Regardless of global location, these businesses make decisions quickly and are inherently customer-driven. On the crucial areas of regulation and digitisation, they see it as both scary and exciting, rather than only the former.
Where embracing change is in the DNA of the mobile homers, the castle dwellers may want to change, but they are all too often hampered. Culture, regulatory and arguably social responsibilities weigh heavily upon them.
We should not disregard the pressure of social responsibility; this is evident in the negative reception to the closure of local branches which continue to be a burden. They may want to be more agile, but it is simpler harder for them to achieve.
The Road Ahead – In a Fintech World, Tech is Not Immune to ‘Castle Syndrome’
Financial institutions are not alone in being at risk of ‘castle-syndrome.’ So are tech providers. Perhaps the old adage that ‘you won’t get fired for choosing IBM’ is a little less accurate than in yesteryear.
As a business working with a rapidly growing audience of challenger financial services business around the globe, I can report that they want tech and people that think and act like they do.
Challenger financial businesses live up to their moniker; they challenge everything and are not slaves to convention or reputations. As a like-minded tech business, they are a pleasure to work with as they encourage us to challenge them and use our broad experience to help guide them. Challenge it seems is a two-way street.
Traditional banks it seems are struggling to find their place in today’s digital age, yet, I don't doubt that they will remain important. After all, castles do not disappear overnight
Allen Jones, MD Copernicus