Imagine Less Than 50 Banks Left In The World By 2030

Another question someone asked me recently is: “do you think incumbent banks can step up to the stock tickerdigital challenge and take on the likes of Amazon, Apple, Google and Facebook?”

I said: “no”.

Sorry guys, but the answer is negative.

There are various reasons for this.

First, as was popularly retweeted by many last week, Amazon, Apple, Google and Facebook do not have a Head of Digital, they just are digital.

There is no head of digital at Amazon or Zappos – they ARE digital. Banks need to be, too. #RB14
— gschmeltzer (@gschmeltzer) March 13, 2014

They were invented for the internet age as entities leveraging customer data to create digital commerce.

Second, can you think of one digital business that evolved from a physical one?  Not any bookstores, record shops, photographic stores, video rental firms or similar evolved into an internet age powerhouse.  Instead, they have been decimated by the new digital firms.

Third, the digital firms were all invented to solve a problem.  Hey, I wanna find stuff,and here’s Google.  Hey, I wanna share stuff, and here’s Facebook and Twitter.  Hey, I wanna download stuff, and here’s Apple.  Hey, I wanna buy stuff, and here’s PayPal for sending money and Square for taking money.

Fourth, no company can behave like a start-up and no start-up can behave like a company.  Companies are there to preserve the company; start-ups are there to destroy the company.  The two don’t think or act the same way until the upstart becomes The Company.

Fifth, part of the reason why companies cannot behave like start-ups is that they are often led by someone who took decades to get to the top of the company.  When you’ve spent all your working life clawing your way to the top, the last thing you want to do is destroy the very fabric of what got you there.

I could go on, but there’s an interesting nuance to this dialogue, and this is the other question I get asked a lot: can an upstart seriously take on the banking industry and win?

And the answer to that is also no.

As demonstrated by Simple, Moven, Fidor and more, they are fledglings and what happens to fledglings is that they fall out of the nest, can’t fly and die; or they fall out of the nest, fly and get eaten by a predator.

That’s what’s happened to Simple in the sell-out to BBVA, and is going to happen to others as they flounder or flourish.

Equally, the real reason start-ups cannot challenge core banks is due to the banking licence challenge.

When you look at the barriers to entry to banking, the biggest one is getting a banking licence as that requires compliance with regulation, and the regulations are massive.

Take the launch of Metro Bank in the UK.They could have launched in one year, but it took three years.

The two-year delay was for two major reasons:

  1. The Board had to be signed off by the regulator who checked and vetoed every individual to make sure they were worthy
  2. The bank had to prove it had the capital to cover each branch opening

The capital requirement is that you need to have enough to cover a branch failure with an average 10,000 customers per branch.  For each customer, you have to guarantee €100,000 of their deposits with the financial services compensation scheme (FSCS) (by law) and so, in effect, you need to show that you have the capital to cover €1 billion coverage for each branch.

OK, it’s not that extreme. Let’s say you can get away with €10 million per branch and then have the rest covered through your own insurance, but even that means that a 100 branch bank opening requires €1 billion in capital at the opening.

This makes it incredibly tough for any new entrant to crack the walls of the incumbents.

So who can take on the banking industry?

Who?

Well the only real contender is Google, right now.

We talk about Amazon, Apple and Facebook, and they might, but Google is the one that could and should.

It’s interesting in that twenty years ago we thought Microsoft would break into banking or Virgin.  Neither has.  Virgin for the reasons given above (lack of funding) and Microsoft because they said: “The banks are our customers. Why would we want to compete with our customers?”

But banks aren’t Google’s customers and Google has enough cashflow to put €1 billion into opening or buying a bank.

Take it a step further: what would happen if Google acquired Citibank in a hostile takeover tomorrow?  What would you do? How would you react?

This is the scenario you should be using for planning your bank’s strategy and this is the reason why all the banks I talk to are really scared of Google.

Come the day when Google does buy a bank, we will see our banking world really tested.

“In two decades, we will go from 20,000 ‘analogue’ banks today worldwide to no more than several dozen ‘digital’ banks.” 

Francisco González, CEO, BBVA, Banks need to take on Amazon and Google or die, Financial Times, December 2013