The Disintermediation of Business Banking

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I recently had the pleasure of “attending” the LendIt Fintech – Europe 2020 virtual event.  Now, much of the content covered banking services for Small and Medium Enterprises (SMEs), an area that personally I’m not particularly familiar with, but one that is gaining more focus in the news of late.  One thing that struck me was the potential disruption of traditional business banking brought about by open banking.

City Currency

The pandemic has revised interest in a topic that has surfaced repeatedly in Tomorrow’s Transactions events over the years, and that is the issue of local and complementary currencies. The Bristol Pound, the Brixton Pound, the Lewes Pound and many other experiments have sprung up around the country (indeed, around the world) to try to stimulate and regenerate local and regional trade and prosperity in response the changing economic circumstances. We tend to think of currencies as being instruments of the nation state but that’s actually a recent invention in the great scheme of things. There’s no reason to see optimal currency areas as inviolable laws of nature rather than transitional borders under prevailing monetary and financial arrangements.

No fintech disruption? It’s already started

I came across an article in Finextra about fintech and disruption. I put it to one side, meaning to respond to it, but I didn’t bother because Brett King got in before me. However having just come across my notes while looking for something else, I thought I’d spend a few minutes on it because I want to make a general point about the relationship between banks and fintech. The article said that, in essence, there is no fintech disruption in UK banking because most customers don’t want to switch banks. That’s an interesting hypothesis about the measurement of disruption, except that I can’t ever remember anyone I know saying that one of the effects of current fintech initiatives would be customers changing bank accounts more frequently.

The much hyped ‘digital disruption’ in the UK banking sector appears to be a non-event for the majority of consumers, who remain steadfastly unimpressed by noisy new entrants and new-fangled tech. A YouGov and ACI Worldwide online survey of more than 2000 UK adults found that the overwhelming majority of current account holders in the UK (88%) have no intention of switching bank accounts within the next 12 months.

[From Finextra: Finextra news: Forget the hype: Bank customers unimpressed by ‘disruptive tech’]

Personally, I think this figure is irrelevant. We already know that fewer people are switching accounts than before the UK banks were forced to spend a billion quid on the new account switching system, fintech or not. The point about fintech, I would have thought, is that it eats away at bank profit pools, not bank customers. I still have my Barclays account even though I use TransferWise to send money to my US account. Anyway, on to technology. One area where fintech might have had an impact is around the internet and mobile phones. Yet according to this article

a staggering 59% never use mobile banking within [a month]
[From Finextra: Finextra news: Forget the hype: Bank customers unimpressed by ‘disruptive tech’]

This is correct, but it’s not the story. That’s that according to the British Bankers’ Association (BBA), “banking by smartphone and tablet has become the leading way customers manage their finances”. The leading way. Not “a way”, the “leading way”. And while about a third of adults use mobile banking now, the BBA expect this to be two-thirds within five years.

Currently, just over a third (34%) of UK adults are estimated to be banking on their mobile. With the increasingly widespread ownership of smartphones and a growing appetite amongst UK adults to access their finances on-the-go, this figure is expected to almost double to 60% by 2020.

[From UK mobile banking set to double to £3.4 billion a week » Banking Technology]

So the survey is instantaneously accurate, but doesn’t tell us much about the future because it doesn’t show the trend, and therefore isn’t very interesting. I think the ACI survey covers much more interesting ground when it looks at the impact of technology companies.

Further, 78 percent of those surveyed stated that it is unlikely they would use banking services offered by the likes of Google, Apple or Facebook—household names in today’s ‘digital age.’

[From Finextra: Finextra news: Forget the hype: Bank customers unimpressed by ‘disruptive tech’]

I don’t know what the “banking services” offered by Apple or Facebook are, and couldn’t find any mention of them on their web sites, but “banking services” to me means “services that you need a banking licence to provide”. To the best of my knowledge, neither Apple nor Facebook have such a licence and I have no reason to suspect that they might want one. Hence my summary of the survey results would be “100% of customers have never used a banking service from Apple or Facebook because there aren’t any and can’t imagine what they might be even if there were and hence there’s no point asking them about it”. You might well also want to ask why Apple or Google would want to do it. The answer is, of course, that they don’t. Who does?

operating a regulated deposit-taking banking license is incompatible with the pursuit of profitable growth

[From Finextra: Finextra news: Regulatory costs force loss-making Tungsten out of banking]

Why would Apple want to do something as heavily regulated as banking? Ah, you might well protest, but what about Apple Pay? Isn’t that a “banking service”? The answer is no. (And in any case, Apple Pay is a reactionary play that uses the card rails provided by banks.). Still, apparently, this is one area where some customers are responding to the new products and services forged in the white heat of the Old Street fintech forges.

However, the results also suggest that a smidgen of change is evident with long-endorsed practices such as the use of PayPal and Internet banking gradually achieving mass-market acceptance. Equally, technologies which can demonstrably improve the customer experience, such as the use of contactless cards to tap and pay at the checkout, are showing faster uptake.

[From Finextra: Finextra news: Forget the hype: Bank customers unimpressed by ‘disruptive tech’]

Internet banking is “gradually” achieving mass market acceptance? Really? Thanks for bringing us these dispatches from the front line, Finextra!

Look, banking isn’t going to be disrupted because somebody new uses technology to deliver the exactly the same highly-regulated banking service that banks already provide. Banking is going to be disrupted by competitors using new technology to deliver specific services in a better way, drawing away customers for those services, and undermining bank profit pools as a result. P2P lenders don’t offer bank accounts, so it’s pointless trying to measure whether (e.g.) Zopa has been disruptive by looking at how many people have switched bank accounts. I still have my Barclays savings account (with four quid in it) even though I have a Zopa account that delivers around triple the interest rate. What’s important to measure is the impact on bank profits and since P2P lending directly competes with unsecured personal loans (which according to Goldman Sachs have the biggest banking profit pool at risk), I would imagine that this is already showing up on bank spreadsheets.

What’s the reality? Well, in his predictions for 2016 (“The World in 2016”), Stanley Pignal (the Banking editor at The Economist) said that fintech is on the rise and that $1 billion companies will start to seem like “old hat” in 2016 for the finance industry’s technology-driven new stars as the $10 billion club will have a growing membership. He goes on to say that while even the big fintech players are still small in comparison with the incumbents, they have already forced banks to sharpen their game. If the growth continues, however, they will become more substantial competitors. The disruption has already started.

P.S. Sincere congratulations to Giles Andrews of Zopa on his OBE in the Queen’s New Year’s Honours List. A thoroughly well-deserved gong that couldn’t have gone to a nicer guy.

Time to get rid of my dongle

I just had to quickly log in to my online banking service to transfer some money to someone who doesn’t have PingIt, yawn. So I had to enter my sort code, account number and name and then use my bank’s 2FA dongle with my chip and PIN card to get a security code to enter in to the web site to log in to create a new payee and then send the money. I have to say that it all worked OK, but in an age of touchID it’s beginning to feel a little tired. While I was doing it, I started to think about the way that I could log in to my USAA account just by looking at my phone.

Biometric log-on is the latest effort by USAA to offer novel solutions to its members. The app is designed to heighten security as well as to improve the overall member experience.

[From Biometrics in Banking – PaymentsJournal]

Logging in by looking at your phone is, just as touchID is, about convenience before it is about security but it  certainly does enhance the latter. The way in which different biometrics are combining with the smartphone to create a new security landscape is starting to shape the mass market and it is really interesting to be working with our clients on bringing the technology to market and exploiting it effectively in different sectors.

Voice biometrics, fingerprints, iris scans, and other authentication options are beginning to replace passwords as a means to verify a user’s identity and simplify the login process when banking online or via a mobile device. The key is to provide enhanced security against hackers while improving the overall user experience.

[From Biometrics: Fighting Fraud and Protecting Identity In Banking]

If you are interested in this sort of thing, there’s a terrific lunchtime roundtable on biometrics in banking coming up. It’s organised by the Centre for the Study of Financial Innovation at SWIFT in the City on 11th May. The panelists will be:

  • Rick Swenson, the USAA Executive responsible for Fraud Operational Excellence and Strategic Initiative who will share USAA’s experiences with biometrics and explain why their approach has been so successful.
  • Oran Cummings from MasterCard, who will give an international perspective on the use of biometrics in the financial sector.
  • Keith Gold, formerly with IBM Banking and Financial Services Europe, who has been helping the CSFI to understand the requirements of an ageing population, will talk about the importance of biometrics in the useability toolkit needed to this key segment of bank customers (or, why looking at a mobile phone is easier than remember a PIN for most of us!).

The usual well-informed and wide-ranging discussion will ensue, with wine and sandwiches for all. Don’t miss this opportunity to learn from Rick while he is visiting the UK. There may be a few places left at this free event, so if you’re interested in seeing how the biometric state of the art is advancing in banking, contact anna@csfi.org for further details and to reserve your place.

The new PSR’s priorities

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The UK’s new Payment Systems Regulator is now open for business. I imagine that their highest priority work stream will be around access to payment systems, because this is what “challenger” banks need in order to create the more competitive environment that the UK Treasury wants.

Biometrics are already mass-market for banking

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Biometrics aren’t really futuristic any more, and even in as conservative a sector as banking they are being deployed in the mass market. I’ve helped to organise a CSFI roundtable on the topic to share some practical experiences. (Revised 22nd April 2015 with updated roundtable details.)

I’m not sure that “unbanked” is the problem or that “banked” is the solution

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There’s been a lot of buzz around Bill Gates’ challenge to bank the unbanked, set out in this excellent Verge article. Naturally I agree with the sentiments, but the use of the word “unbanked” bothers me.


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