Why the future of banking lies with the fintechs

If you’re look­ing for a clue as to what the future of fin­tech could look like, the best place to start is the auto­mo­tive indus­try. For more than 100 years, car mak­ers have relied on the fos­sil-fuelled inter­nal com­bus­tion engine to pro­pel their vehi­cles. Con­sumers have grown up with ‘for­ev­er brands’ – behe­moths such as Volk­swa­gen, Ford, Toy­ota, Fiat and Mer­cedes. Not so long ago, the car man­u­fac­tur­ing par­a­digm of glob­al mul­ti-brand own­ers mak­ing petrol and diesel cars seemed like it would last for­ev­er.

Enter cli­mate change, how­ev­er, and in lit­tle more than a decade car mak­ers have been forced to con­front a new and bru­tal real­i­ty. They need to move on from the inter­nal to a future where the elec­tric motor reigns supreme. And while it seemed incon­ceiv­able that a new car mak­er could chal­lenge the might of the big car man­u­fac­tur­ing brands, today Tes­la is the world’s largest automak­er by mar­ket val­ue.

Banks are much old­er than car mak­ers – indeed bank­ing is one of the world’s old­est pro­fes­sions. This is so much so that from time to time some of the big­ger banks like
to remind us just how long they’ve been around, as if that was the only thing of mer­it they could legit­i­mate­ly claim. The bank­ing par­a­digm has sur­vived war, pesti­lence and social upheaval, but for more than a decade now, banks have been under con­stant and intense assault.

Tougher cap­i­tal rules in the wake of the bank­ing cri­sis, low inter­est rates, mas­sive mis-sell­ing fines and the impact of mobile tech­nolo­gies on cus­tomer behav­iour have com­bined to make these years among the most dif­fi­cult in the his­to­ry of the indus­try. To add to the banks’ woes, after almost 100 years with­out a new­ly autho­rised bank to offer com­pe­ti­tion, chal­lenger banks, neo-banks and fin­techs firms have arrived on the scene, ready to do bat­tle. Hun­dreds, if not thou­sands of new fin­techs, have been pur­pose­ful­ly invent­ed to under­mine bank rev­enues and to dis­lodge bank cus­tomers. They exist to dis­rupt bank­ing.
The dis­rupters come in many forms. Some offer new cur­rent accounts, some focus on for­eign exchange and trav­el mon­ey, some – like Atom – offer sav­ings and loans, but all are look­ing to grow at the expense of the estab­lished banks.

For the major­i­ty of fin­techs firms it has been a very tough slog. Estab­lished banks don’t give up eas­i­ly. Theirs is a busi­ness mod­el that relies on cus­tomers who open a cur­rent account when they are teenagers and then stick with that same bank until the grim reaper arrives to gath­er his har­vest. Theirs is a busi­ness mod­el that appears to give ser­vices away free of charge, but all too often recov­ers the costs of doing so from those who are least capa­ble of pay­ing. Theirs is a busi­ness mod­el that pur­ports to offer all things to all peo­ple with­in a con­ve­nient one-stop-shop, but usu­al­ly ends up deliv­er­ing low lev­els of ser­vice and high lev­els of mis­trust.

His­to­ry is lit­tered with pre­vi­ous­ly untouch­able busi­ness­es that have ulti­mate­ly been dis­rupt­ed – the busi­ness equiv­a­lent of get­ting can­celled. Flag-car­ri­er air­lines, high street fash­ion retail­ers and big-name super­mar­kets have fall­en by the prover­bial way­side. A new busi­ness that can do some­thing bet­ter or that offers bet­ter val­ue than an incum­bent will do well. But a new busi­ness that can do both will thrive. Need­less to say, that’s our ambi­tion for Atom.

The future of fin­tech is the future of bank­ing in much the same way that elec­tric motors are the future of car propul­sion; there is no mean­ing­ful dis­tinc­tion between the two. Estab­lished brands that can adapt might endure into the future but those who can’t will almost cer­tain­ly fade away.

The whole­sale dig­i­tal­i­sa­tion of mon­ey and of bank­ing has changed the rules of the game. The famil­iar uni­ver­sal bank­ing mod­el with its branch­es, con­tact cen­tres, inter­net bank­ing, mobile apps, and decades of tech­nol­o­gy and cul­tur­al lega­cy is hor­ri­bly inef­fi­cient. In an increas­ing­ly dig­i­tal econ­o­my, inef­fi­cien­cy is weak­ness to be exploit­ed. The lega­cy bank­ing brands, just like the lega­cy car man­u­fac­tur­ers, real­ly are ripe for dis­rup­tion.

Spe­cif­ic brands might not be guar­an­teed to sur­vive but bank­ing itself has a long life ahead of it. The bank­ing mod­el is an effi­cient, rules-based con­struct – it’s the bankers who turn that effi­cient con­struct into inef­fi­cient busi­ness­es. The relent­less dig­i­tal­i­sa­tion of every aspect of the mod­el, from how banks inter­act and pro­vide infor­ma­tion to their reg­u­la­tors through to how they use AI to opti­mise lend­ing deci­sions, will inevitably trans­form them into soft­ware com­pa­nies free of any resid­ual phys­i­cal man­i­fes­ta­tion. Fin­tech com­pa­nies, how­ev­er, are already there.

Don’t for­get, Tes­la builds cars because cars cre­ate val­ue for cus­tomers – they want and val­ue the con­ve­nience of per­son­al trans­port – oth­er­wise, Tes­la might well have cho­sen to make trains or bus­es. How­ev­er much they are unloved (and let’s be hon­est there’s more than enough ‘unlove’ to go around), banks also cre­ate val­ue for cus­tomers. We have heard some very clever peo­ple declare that inno­va­tions such as cryp­tocur­ren­cies will replace the cur­ren­cy and bank­ing sys­tems that exist today, but we should be cau­tious – it’s hard to know in advance which dis­rup­tions will lead to bet­ter out­comes for cus­tomers and which to out­right anar­chy.

But noth­ing lasts for­ev­er. Right now, elec­tric motors rely on a group of met­als called ‘rare earths’ to pro­vide the stored ener­gy they need for pow­er. The clue is in the name – these are scarce, finite and expen­sive, and there sim­ply aren’t enough to go round. And so we need to keep inno­vat­ing. And we shall.

The same will be true for fin­tech firms.

For more infor­ma­tion please vis­it atombank.co.uk

Pro­mot­ed by Atom Bank