Grow, Restructure, Grow, Restructure…
The business of banking has been around since time immemorial, its origins stemming as far back as 2000BC where merchants made grain loans to farmers and traders, setting out on tablets of stone “contracts” that governed the procedures for handling capital repayment, interest, obligations and guarantees. Whilst over the centuries banking has evolved from being based on barter and gift economies to becoming the complex, globalised, technology driven, internet based industry we see today, the fundamental business model has not really changed from that in place in the ancient cities of Assyria and Babylonia or used in Florence and Venice in early Renaissance Italy.
A model that has held true for centuries is however in the midst of huge disruption and disintermediation… The business of banking is about to change….
….Although perhaps not if according to the strategic priorities and focus areas of the incumbent banks over the past ten years.
Strategic Priorities
I’ve done some nerdy things before but going back over the UK Big Four Bank’s strategic priorities from their Annual Reports over the last 10 years has to be up there. The obvious trends of stagnating growth and challenges delivering returns beyond the cost of equity aside, what was really striking is that despite an environment that from an economic, demographic and technological perspective which has been rapidly shifting from one year to the next, just how little the Banks strategic priorities have changed. Instead of talk of reinventing and reimaging business models to be fit for a world that even back as far as 2010 was becoming increasingly digitised and lived online, strategic priorities year in year out were:
- Top Line Growth
- Restructuring for growth
- Exiting “non core” markets
- Offering more services & products to existing customer
- Redeploying capital and reducing RWA’s
- Delivering efficiencies and streamlining processes
All sensible things to do sure and no doubt necessary following the financial crisis and after years of having expanded at all costs through increasing leverage with little regard to risk and longer term societal impact. Arguably though all are just table stakes statements and not really reflective of strategy where a diagnosis identifying the challenge, a guiding policy to deal with it, and coherent actions are required. Sure during most of the years there were statements outlining a purpose, vision and goals but these were often short term and tactically focussed, often being scrapped or refreshed every couple of years to be replaced by more short term targets and tactical initiatives, with the same strategic priorities- grow revenues, improve returns, cut costs and invest in growth markets. Hardly ground breaking, innovative or future thinking then, but rather focussed on managing steady state, rinsing and repeating the same business model underneath flashy purpose and values statements.
As far back as 2010 all were talking about the need to rationalise and simplify their businesses, with the acknowledgment that core systems had become too unwieldy, processes too complex and siloed , with IT in need of investment and streamlining. Without a direct attack imposed on their business models however and operating in an oligopolistic market there was no real incentive to truly tackle what was even then creaking IT infrastructure and systems not designed or fit to operate in world that was becoming increasingly digital and cloud based.
The world is changing?
The first real mention and acknowledgment of consumer and business behaviour changing and digital no longer just being seen as simply another distribution channel came in 2017/2018, with arguably driven as a result of the NeoBanks having started to chip away at the stranglehold the big four had held on personal accounts for decades through offering completely digital onboarding, a slick and intuitive banking app and overall an experience free of friction and completely transparent. Rather than the wake up call for the Banks to think about their own business models and take the opportunity to truly innovate they simply focussed on cannibalising their own revenue streams by building or buying their own NeoBanks. The thought went “better to cannibalise our own business rather than have someone else do it to us”, but weighed down by legacy systems architecture and tech debt that has accumulated over decades any attempts to “keep up” with the Neo’s and Fintechs have largely failed or been consigned to just another product operating in a cultural silo but still having to work within the mainframe and core banking platform with its roots dating back to the 80’s and 90’s.
As we came towards the end of the decade the annual reports were speaking to a realisation that the threat posed by Fintech’s wasn’t simply going to disappear or be regulated away, and that now simply delivering efficiencies, restructuring and redeploying capital was not enough. Strategic priorities were focussing around “accelerating digital transformation” creating cultures of innovation, and embracing cloud, artificial intelligence and Open Banking technology. The realisation that their business lines whether payments, savings, lending, investment or FX were now trading away to Fintech’s and Bigtech had been brought into sharp focus and yet ten years of restructuring, focussing on selling more product and divesting non core activity as opposed to focussing on changing the business model and truly investing in digital capabilities has meant they all entered 2020 more than just on the back foot and under attack from all sides.
The Next Ten Years
The next few years are already set to be some of the most exciting, innovative and disruptive for the financial services industry, and with consumer behaviours having gone through seismic change as a result of Covid, digital adoption as a bi-product accelerating and new technologies emerging all the time, the industry is set to experience a wave of innovations aimed at making customer experiences faster, cheaper, more intuitive, customised and integrated.
Take Decentralised Finance. Traditional banks require massive infrastructure to just keep the lights on, dealing with clearing, compliance, and managing capital is expensive, convoluted and resource intensive. By contrast, transactions on a blockchain are trustworthy, cheap, transparent, getting faster all the time and soon will be free of any friction whatsoever.
Or Central Bank Digital Currencies which have the potential for Governments to simplify the implementation of monetary and fiscal policy and be better able promote financial inclusion by enabling those shut out of the banking system to be able to receive and make payments, spend and invest with just a mobile phone and not a bank account in sight.
Perhaps most exciting of all is the potential that truly harnessing the power of data and AI to deliver embedded finance experiences can bring. It is already the case that no longer does someone need to be a bank to offer banking services, but increasingly finance will become invisible and interwoven into the fabric of people’s lives. Whilst it will continue to be hotly debated there is no doubt that BNPL has disrupted the Credit Card businesses, or that RobinHood and Coinbase have changed the way people think about investing. The pace of change and innovation is only going to continue accelerating.
Not all established players or incumbent banks will survive the attacks to their legacy business models, and many will have to accept a smaller or new role in an industry that will no longer be dominated by banks but technology companies where software protocols and lines of code rather than people or buildings will be the drivers of value.
A review of ten years of strategic priorities does not give for much confidence for the years ahead, and so if banks are to survive the next ten they must do more than just embrace change… They have to be the change.
