Sesame Street aired its first episode fifty years ago this week but it’s all change these days. Of course, Kermit and Big Bird are still around, Bert And Ernie are still good friends but this childhood staple is now a pay-TV item courtesy of HBO. In the politically correct minefield that is the US today whoodathunk that paying for Sesame Street would attract the least social debate from that summary update. One must get used to change. And if we are going to reference muppets and commerce then it’s not a huge stretch to visit the topic of banking.
It is no secret the banking sector faces huge technology challenges. Some banks will fail. Some will thrive. The differentiating factor will be their success in ‘fintech’, or more explicitly, the application of technology in financial services. The planet has its first billion customer financial services franchise, Alipay, but this business was built on technology not a traditional bank branch network. The opportunities in fintech are enormous as the arms race continues between old-style banks and new tech-savvy financial platforms. It will be fascinating to see how this battle plays out but here are 5 trends we are keeping a close eye on.
- Global fintech funding activity: Funding activity in Q3 2019 reached $12.3 billion according to the latest FT Partners report. That is the most active quarter ever despite the global economy slowing down. This tells us that fintech spend is a structural trend irrespective of economic cycles.
- Bank vulnerability: Consultants McKinsey have published a report saying that a significant economic downturn would put 60% of banks in a weakened state which they may not survive. McKinsey have called for the banking sector to “urgently consider a suite of radical organic or inorganic moves before we hit a downturn”. Banks will be making plenty of announcements in the coming months. It won’t be just HSBC and Deutsche Bank.
- Mobile meets banking: The partnership between Goldman Sachs and Apple on a payment card has attracted plenty of criticism of its gender-biased credit algorithm. Not a cool start but the trend is set. Mobile ecosystems are perfect for financial services.
- Big Tech wants to bank: The aforementioned 1 billion customer financial platform, Alipay, in China has not escaped the attention of other big tech players. It is no surprise to see reports of Google plans to offer checking accounts to consumers in partnership with traditional banks. Amazon are already doing credit cards and business loans so the lines between tech and banking are becoming very fuzzy.
- The war on cash: Surveys of consumers’ last 10 purchases reveal that a whopping 60% of payments are now executed without cash. In some countries like Sweden, that percentage can be over 90%. The shift to audit-friendly digital payments is very attractive to governments and regulators so expect further moves in the currency/cash arena. Facebook will struggle for credibility with its Libra cryptocurrency but there will be other players who won’t have to admit they will happily bank profits to publish false information. Banks may not have a great reputation but Facebook appears determined to win the race to the credibility floor. Currencies need credibility. New currencies, crypto or other, have failed that test so far.
The good news for consumers and businesses is that fintech should deliver better services at lower costs. Consumers and costs are only moving in one direction. On that basis, this writer would actually suggest the McKinsey report is too optimistic. Muppet leadership and poor economics don’t need a recession to kill off more than 60% of banks. The trends are irreversible and the unloved status of banking means there will be no HBOs to save the muppets.
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