Big tech is turning banks into dinosaurs

People still need banking services. But banks? How sustainable are they in 2019? That’s another matter.

A traditional piece of banking business business model is going away. Namely, they will no longer make money off of money. Doing so is no longer profitable. High interest rates are gone and they are never coming back.

But really it's technology that is sealing the fate of retail banks. Most things that consumers once relied on banks to do—manage savings and checking accounts, loan money, issue credit cards—are already transitioning away from banks to the fintech sector, which has found ways to do these things more efficiently.

David Paul Morris/Bloomberg

Retail banks are not agile. They are highly bureaucratic, risk-averse and slow to respond to consumer demand. They also lean too much on legacy systems (something Forrester warned them about in 2017). The banking system relies on outdated and costly databases—like SWIFT. High transaction fees are baked into this system, which automatically excludes millions of people from the financial mainstream.

Banks can deploy all the blockchain technology they want. Blockchain will not help them to compete with “free,” which is what millennials—today's predominant demographic—demand.

According to 2016’s Digital Banking Report, millennials (those born between 1980 and 1998) view retail banks through a tom-ay-toe/tom-ah-toe lens. They see no real differences between one big bank and another.

In fact, more than 70% of millennials would rather visit a dentist than a bank. Meanwhile, the same study found they are receptive to using Amazon, Apple, Square, PayPal and other services to meet their banking needs.

Some in the industry will roll their eyes at these findings. They have been warned about the coming fintech threat for two decades. But, as it turns out, it was not fintech upstarts that posed the greatest threat to banking, it was Big Tech. As industry consultant Maureen Burns said: “We talked about fintech as potentially [upending big banks], but the reality is it's … bigger technology firms like Google and Amazon [that are the threat].”

High-tech heavyweights like Google, Amazon and Apple have only added to the view that banks are less relevant. They’ve shown consumers they no longer need banks to move money.

Apple can already do banking better than any bank. Users already have the device at their fingertips and they are already loyal brand advocates. And because Apple obsesses over improving the customer experience, that momentum will only build.

But consumers and merchants do not even need smartphones to transact. We learned that back in 2007 when Vodafone launched M-Pesa, a peer-to-peer, mobile money service. It enabled users to make purchases, deposits, withdrawals and pay bills all on a flip-phone. Initially available only in Kenya, M-Pesa now boasts 30 million users in 11 countries.

This leaves only lending as the final frontier and banks are being squeezed out of that process as well. Lending can now be done more efficiently and transparently using blockchain technology. Banks cannot compete with such a business model because they offer no value in the process. The typical bank loan costs too much and puts borrowers through a cumbersome process. And each loan—car loans, mortgages, business loans, lines of credit, credit cards— requires a new application. Blockchain makes these hurdles a thing of the past.

Banks are not going anywhere. They are just being forced to find other ways to earn profits beyond renting money to others. The institutions that are successful will be those that help build a consumer-friendly network based on trust—one that connects the old economy to the new. They will provide new forms of investments, financial advice and recommendations; they will offer new types of custodial services—for both real assets and digital ones.