When I joined SVB UK from J.P. Morgan back in 2012, there hadn't been a new UK Bank in years. Small Banks weren't calling themselves ‘Challengers’ (they were just small) and even ‘Fintech’ was so embryonic that today’s “Disruptive Fintech companies” just called themselves FX Brokers.
Oh I jest (well, sort of).
Looking at 2015, we now have 6 new ‘Challenger Banks’ launching in the UK and Fintech is enjoying such a period of explosive growth that even Traditional UK Banks are taking notice. There’s lots of talk about Fintech being an enormous sector (it is) that’s hugely complex (it is) but when people describe Fintech as “hugely disruptive to Banking as a whole” it’s so often not the full story. So rather than get into a detailed commentary around specific Fintech verticals, I wanted to share two layman friendly Fintech categories:
Bank Betterment and Bank Breakers.
Firstly, I want to point out that as ‘Fintech’ is such a catch all phrase for a MASSIVELY diversified sector, this article is written with Commercial Banking (lending, payments, FX, Trade, liquidity) as a focus, but broadly Betterment vs Breakers applies to most areas.
Bank Betterment is the Fintech that partially or fully requires banks to enable their improvement of traditional products. Bank Breakers are those re-designing Finance to create entirely new operating realities.
Both sectors are trying to solve the same problem, the notion that our Global Financial System is inefficient/broken/evil and ripe for change….but are coming at it from two different angles, evolution & revolution. This article isn't about picking winners & losers (we can do that another time) but I hope it will be useful to set a landscape & context — so to do that I’m going to seek parallels in a battle that’s already played out, passenger shipping.
I've long argued that today’s Banking experience in the UK looks a lot like crossing the Atlantic did 100 years ago. In the 1900's, if you wanted to go to the USA you needed a boat & back then you pretty much had a choice between the vessels of the two industry giants serving the Trans-Atlantic route, White Star and Cunard. The journeys were long, expensive & infrequent, it sucked — but if that’s where you wanted to go — that’s how you got there.
Cut to Banking in 2015 and if you’re a Business looking for Banking solutions, you've got about as much choice as a Victorian traveller and that’s why you probably do what the vast majority of your 5.2 million counterparts do and work with one of the ‘big UK banks’…
Not because you really want to, but because you don’t have much choice.
UK Banking is the modern day White Star & Cunard. The largest Banks (Barclays, RBS, Lloyds, Santander, Nationwide & HSBC) all enjoy a historic monopoly — accounting for 70% of lending to ALL UK businesses, 85% of SME lending and 50% of all consumer credit. When you add in the fact that those Banks also own a whopping 93% of the Bank Account market for all consumers & businesses, the lack of real choice is staggering!
Of course, this would be understandable if they were brilliant at what they do — but as those institutions have all been fined billions for an array of misconduct, misselling and malpractice in the last 4 years alone and only recently a poll put Bankers just above Parking Wardens on a list of respected professions — it’s fair to argue there’s huge room for improvement…(and I work for a Bank.)
This is why people are so excited about challengers looking to level the playing field and provide a better customer experience. Consumers and businesses alike are hungry for cheaper, faster, better Banking Services and this is where Bank Betterment Fintech is beginning to oblige by leveraging existing bank infrastructure to repackage and deliver better experiences.
So what does this mean for the Big Bank incumbents?
Bank Betterment delivers its services, by acting as a parasite on Bank rails.
It’s not the prettiest terminology, but it’s not far off. Theoretically it hurts Banks when Fintech hacks its infrastructure to dis-aggregate their customer relationships, but on the other hand these aggregators can act as enormous customer acquirers and be extremely lucrative clients for banks who’s ‘rails’ they rely on (and pay for) — there’s a rough balance in opportunity & threat.
Take something simple like spot FX for example (e.g. Azimo, Transferwise, World Remit and many more) Bank Betterment’s curious achievement is that it can actually white label the infrastructure of the underlying banks so well, that it’s entirely possible for one Bank to fundamentally provide every leg of the process behind the scenes, whilst the Fintech firm takes all the visibility & the vast majority of the revenue.
For the Banks not providing the rails to Fintech, this is bad news as it’s your customers they’re after so you’re going to have to adapt & compete. For the Banks that work with Fintech firms, they face a strange paradox of total pricing disaggregation from some existing customers whilst benefiting from a lot of customers & volume they would never have had — mixed emotions.
So that leaves a critical question,
Is Bank Betterment Fintech the messiah or just a very naughty boy?
How will Banking react? Lets see if 20th Century Shipping has any insights for us…
In the early 1900's technological advancement in new markets significantly reduced barriers to entry for new Shipbuilders and as a result, the historic dominance of England’s Ship-building industry started to be challenged.
Both White Star & Cunard began to face competition from smaller, quicker ‘challenger boats’ from Germany, France & Italy who started to present a real alternative to the mainstream providers. This ‘Boat Betterment’ put considerable pressure on the incumbents to innovate and stave off the competition…
So how did the big shipping companies respond to these ‘challenger boats’?
Broadly in two ways — in 1908 White Star set to work designing The Titanic, a vessel that none of the challengers could ever afford to build. Titanic would compete on unparalleled luxury and it’s design would be so fantastic that it would be quite literally ‘unsinkable’. Cunard meanwhile worked tirelessly to make their new boats faster and more comfortable, investing heavily in engines and design to strive towards the much hallowed Atlantic crossing time of 5 days!
5 years later Cunard achieved it’s ambition and broke the 5 day crossing — 6 months later a challenger boat beat it. With the competition fighting away, the Trans-Atlantic passenger crossing began it’s slide into a commercial race to nothing. As with any market containing an increasing amount of competitors offering similar solutions, fares plummeted & eventually Cunard needed a Government bailout to keep building better ships…(the government of course justified this Bailout by saying British Ship Building was ‘too big to fail’)
Pressure from Challengers competing to deliver the same commodity eventually leads to a race that only the customer wins.
The fate of White Star’s Titanic is obviously better known, unfortunately for them and the passengers aboard that maiden journey, it’s because their unsinkable ship was abruptly disrupted by an Iceberg.
In the early days the Boat Betterment, challengers made a LOT of money through delivering a LOT of progress — simply by building better, cheaper & faster boats and picking up the significant slack left by the incumbents. However in the long run these businesses started to look unstable as the costs of the incremental improvement to crossing the sea (read: Bank Rails for Banking) remained vast and the economics of falling fares didn't stack up — there’s only so fast & cheap a Boat can cross.
So is Fintech going to give Banking it’s Titanic moment?
I've heard a lot of pundit’s looking at Fintech Betterment like it’s the iceberg that will eventually doom Banking’s Titanic… but sorry to disappoint the doomsayers, that’s just not going to happen.
It’s worth remembering that the Iceberg that sank the Titanic, didn't kill the Trans-Atlantic passage route, far from it — it continued for another 40 years.
Shipping survived the Titanic, just as it survived the Marie Rose sinking in 1545 for one reason alone: for certain tasks, you need a boat. Today’s Shipping Industry is enormously diversified & still one the largest industries in the world, the passenger side disappeared only because a better solution emerged.
Similarly, Bank Betterment Fintech won’t kill Banking, but it will kill some Banks.
So if Fintech isn't the iceberg that will derail Banking, what is it?
Five years before workman had even put a rivet in the Titanic, although no-one could see it at the time, the Trans-Atlantic passenger route was already doomed.
On the 17th December 1903, on a North Carolina beach, an innovator by the name of Orville Wright took off in his ‘ridiculous’ flying machine at a snail-like 7mph for a total flight time of a measly 12 seconds. When he landed roughly in the desert, people around the world knew it was a huge moment — but it was hard to imagine that one day, you wouldn't need a boat to cross the Atlantic.
It took 30 years after Orville’s 12 seconds of fame for Boeing to unveil what is generally considered the first modern passenger airliner, the Boeing 247. That same year, White Star & Cunard were forced to merge by the British government after bankrupting themselves trying to make ‘better, cheaper, faster boats’ — the Trans-Atlantic passenger route & the vast majority of all passenger shipping globally declined shortly after.
Cunard’s record for an Atlantic passenger crossing peaked at 3.5 days in the 1950's — Concorde’s is 2.52 hours.
We are undoubtedly at the cusp of a revolution in Financial Services but it’s a battle of two overlapping stages. Bank Betterment is a potentially enormous industry that Banks have every right to fear to avoid being demoted to ‘dumb pipes’ and to sort their acts out in the process. This innovation & improvement class for traditional financial services will deliver better, cheaper, faster banking & will delight a lot of customers and no doubt produce a lot of Fintech millionaires….but could well result in some parts of the Banking Industry eating itself (do we really think we’ll be paying to make payments in 20 years!?)
But you won’t find many Orville’s in Bank Betterment.
The Bank Breaking Orvilles are those weirdo’s you call crazy when they tell you Block Chain tech changes everything… but don’t lose too much sleep tonight because they've only really managed their first 12 second flight.
These opinions are my own and do not reflect the views of my employer.