RIP Banks
I, along with everyone else, was struck by the comments of Barclay’s CEO recently. If you missed them, Jes Stanley said he was not worried about fintech challenging Barclays. This was his justification:
“Take for example a fintech company that has a payments system platform, and for some reason it stops working — a software bug or some other hitch. Not pleasant, but it doesn’t cause huge damage. By contrast, every day, 30% of Britain’s GDP goes through Barclays payment systems, and a shutdown of a few hours is dangerous for the British and global economies.
This is the argument that incumbency is a competitive advantage. It is also very close to Kodak’s thinking back in the day regarding digital cameras: we aren’t going to invest in the future to ensure ongoing revenues from today.
Bank motivation
There is a great quote by Eric Weiner that applies directly to this:
Someone wholly invested in the status quo is unlikely to disrupt it.
This is probably a very apt description of Jes Stanley’s position. He is being remunerated as CEO on a quarterly basis. His term is likely to be 5.5 years. He is absolutely right in saying he needs to manage his market share today. And arguably he would be happy to lose a couple of percentage points to small start-ups, especially if he was able to drive down the costs and make the remaining stake more profitable.
In his motivation horizon, he is probably right in saying a small fintech won’t disrupt this area of revenue and profitability. And even if he is wrong and a small fintech comes in and completely disrupts the process, at worst he loses his multi-million dollar a year job. Never mind that he also might erode numerous billions of Barclay’s 35 billion Pound value.
Ostrich effect
I came across the notion of the ostrich effect while thinking about this:
In behavioural finance, the ostrich effect is the attempt made by investors to avoid negative financial information. The name comes from the common (but false) legend that ostriches bury their heads in the sand to avoid danger.
This is just one of a number of cognitive biases that factor into this world view.
Starting small
On one hand, this is certainly bad news for Barclays. On the other hand, this is excellent news for a raft of fintechs operating in the UK and globally. Simply, Barclays isn’t bothered if you bring to market a disruptive model that make payments easier and cheaper. It will leave that market open to you because it believes that small companies cannot be as reliable and therefore trusted as a well-established institution like Barclays.
Of course, this means the likes of Barclays are allowing small fintechs the opportunity to get started and prove their reliability. Over the next 3–5 years, they can build a reputation of day-in, day-out consistency. At which point the big businesses that Barclays relies on will have more choice in the market. But that’s five years away, when Jes will be moving on to a comfortable ostrich farm somewhere.
Also, having been on the inside of a lot of international banks over the last couple of years, my sense is much of the technology that makes this all work is not the most robust.
Example: Wire transfers
Anyone who has had to ‘wire’ money internationally would be aware of this overall mindset. There are charges on top of charges solely, it seems, to make banks money. It’s no wonder that the likes of Transferwise and others have done so well in disrupting this area.
Because the banks have entrenched their plumbing to work on the SWIFT network, their options to compete with non-bank fintechs is limited. As a result they cannot match the disruptive pricing and service. Nor, it could be argued, do they want to: wire transfers are a very profitable part of their business, albeit declining.
Horses bolting
Herein lies the fundamental problem with Jes’s statement and worldview. Once the market is disrupted, banks won’t be able to get their share of it back. With the wire transfer market, they will have to buy or partner with the new players gaining scale if/when they realise there is no profits in supporting the wire transfer/SWIFT system.
Banks today have two choices:
- Maintain a status quo view (and justify that position). This is the short term profit maximiser’s view (aligned to Jes’s tenure). Of course there’s a high risk that the ‘status quo’ (and its associated profits) might disappear in the medium term. In that case, it is the next CEO’s problem to solve.
- Disrupt themselves. In this instance, banks accept that their revenues and profits are unsustainable and seek to provide a significantly lower cost option to the market. This requires investment and risk today but unlocks the potential for a bigger share of the market in the future. This locks in a future value.
Jes is clear on his decision to take Barclays down. It will be interesting to see how his approach plays out after he has left the role.
There is a third option: launch an innovation lab.
