Is your bank really about to experience Uber-style disruption?

To the average person on the street, Uber is amazing and has done more to change the face of transportation than any vehicle manufacturer has done in decades. But to big established players in a variety of industries Uber, or at least the kind of disruption it represents, is terrifying.

Thing is, if ex-Barclay’s CEO Antony Jenkins is right, then people in the banking sector aren’t nearly scared enough.

Speaking in London last week, Jenkins warned banks that they “risk becoming merely capital-providing utilities that operate in a highly regulated, less profitable environment, a situation unlikely to be tolerated by shareholders.”

According to Jenkins’ dire predictions, technological disruptions in the banking space could shrink employee numbers at traditional big banks by as much as 50%, while profitability in some areas could fall as much as 60%.

Read more: These are the legacy issues preventing banks from moving to digital

“In my view only a few [incumbent banks] will have the courage and decisiveness to win in this new field,” Jenkins said during the speech.

Former FNB CEO Michael Jordaan agrees. “Banking is inherently a digital service and can be supplied at a much lower cost than is currently the case,” he told Memeburn in an email interview.

The former Barclay’s CEO identified lending, payments, and wealth management as the traditional banking areas ripest for disruption by nimbler, leaner startups.

The rise and rise of Fintech

This disruption isn’t exactly new: wealth management apps such as Mint and, in South Africa, 22Seven have been around for years now. There’s no doubt however that there’s been an acceleration both in the number of players entering the market and in the size of investments they’re attracting.

Just look at the South African mobile payments space. Five years ago, if you wanted to buy something with your mobile phone, you could use Vodacom’s M-Pesa (which even then was a poor imitation of it Kenyan cousin) and a few other, very basic, USSD-based services.

Today there are any number of apps which allow people to pay for everything from takeout meals to magazines, hotel rooms, and car washes.

Read more: 3 massive trends banks will have to stay ahead of if they want to remain innovative

Outside of the app space, Merchants are also no longer confined to traditional point of sale (PoS) machines when it comes to accepting card payments. Inspired by Jack Dorsey’s Square, Absa’s Payment Pebble, ZipZap, iKhokha, and Yoco all have devices that can turn a merchants’ smartphone into a mobile point of sale.

Some of those solutions are backed by the banks themselves — they have the capital and networks for large rollouts after all — but many of them are independent players out to rip a mainstay of banking business out from under the industry’s feet.

The lending game

Perhaps the traditional banking area ripest for disruption though is lending and there are any number of other players looking to enter that space.

Read more: Are South Africa’s banks really ready for big data ?

Some, like those crowdfunding startups, are looking to fill voids banks can’t (or won’t) fill. Others are betting that lending and borrowing between you and me, is the way forward. Their logic is that the middle-men (banks), are not particularly bothered to provide good rates to borrowers and better returns to investors.

Both routes provide massive potential for disruption, but peer-to-peer lending is probably aligned closest to the Uber model. If you’ve got a little extra money one month, you can sign up to a service and, if you check out, make some decent returns. If you don’t particularly like the experience, you can simply ditch it.

Banks that offer loans typically operate at a profit margin of 20%. They pay savers about 7% (on the high end), and lend their money out to borrowers at higher rates. Legally, banks can charge as much as 31% interest on loans.

P2P loan platforms are loaded with disruptive potential, allowing individuals to directly lend to and borrow money from each other. There is no bank or other large credit provider. If all goes well, lenders earn a better return than what they would have if they had saved their money in a bank. Borrowers also benefit through paying lower interest rates on their loans.

Read more: Too many apps, too little visibility: the big challenge facing banks

Of course, there are other threats to the traditional banking space, including the banks’ own employees and alternative currencies. We’ll leave those for now however, given that they don’t really fit with general trend of “Uber-style disruption” explored in this article.

They do however underline the fact that banks face disruption from every direction. So what can they do in the face of such an onslaught.

Fighting back

According to Jenkins:

Incumbents will need address three significant issues. First, boards will need to accept that we live in a discontinuous world. They should ask executives to take significant but calculated risks by working on projects that no one else is working on. Looking for a linear progression just won’t cut it.

Secondly, there shouldn’t be a technology strategy. There should only be a strategy with technology at its core. There’s a huge difference. And thirdly, leaders need to lead differently. In my experience, people become more risk averse the more senior they become. But doing the same thing a little better is now the riskiest thing you can do.

In South Africa, as in the rest of the world, banks are increasingly incubating, accelerating, and investing in startups — especially those in the fintech space.

“It’s logical for banks to hedge themselves by supporting incubators and accelerators,” Jordaan told Memeburn. “It’s one way of ensuring that a new idea which is inherently cannabilising does not get killed by a corporate culture that has antibodies against things that are not invented there”.

Read more: Does your bank really need a Snapchat account?

They’re also investing massively in their own technological offerings. Sometimes it doesn’t work out so well, other times it does. All of South Africa’s big banks for instance now have apps with features aimed at providing convenience, including prepaid airtime and electricity purchases, cardless ATM withdrawals, and the ability to manage shares.

But they’re also venturing outside the areas we traditionally associate with banking. FNB for instance has been selling smart devices to account holders since 2011. It’s also launched its own mobile network, reasoning that it can provide customers the benefit of a single login to simultaneously manage their financial and mobile accounts.

There’s no guarantee that investing in startups and trying to innovate from within will save banks any more than having their own apps will save traditional taxi operators. As Jordaan notes, ” these moves are clever because they give more value to customers and reduce switching propensity. But the cores service needs to remain competitive”.

The most likely scenario is that some financial institutions will survive, albeit in radically different forms from what we know now, and that others will rise up, ready to in turn be disrupted themselves.



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