Banks feel heat from technology
FROM manufacturing to mobile, cutting edge technology has disrupted a plethora of sectors. Could the banks be next, asks PETER CAMPBELL.
FIRST the politicians came for them, and they were not worried. Then the regulators set their scopes on them, and they did not flinch. Even a global market crash has done comparatively little to knock the banks from their perch.
But now a new assault on the seemingly bomb-proof financial sector could draw blood.
The threat comes from the technology sphere.
Currently banks enjoy nearmonopolies in a number of areas, from payments to credit cards to current accounts. But every one of these areas is being chipped away at by an assortment new technology firms that use the internet and clever software to undermine traditional lenders.
Currently High Street lenders dominate the payments process.
Every credit card transaction, every cheque, every online transfer passes through the internal workings of a bank at some point in a process known as ‘clearing’.
Despite the appearance of instant money transfers, the back office process can take days to complete. But a new technology could render the entire system redundant.
An online currency known as bitcoin allows money t r ansfers between two individuals or groups without having to pass through an intermediary. The technology that underpins it is called blockchain, which cuts out the need for a cen- tral authority to control the information. The use of the currency is not widespread, as most people are understandably cautious about transferring ‘real money’ into a currency that has a wildly fluctuating value (the value of a single bitcoin is currently £181 but has been as high as £747 and as low as £2.83).
It is fair to say that no one will be taking out a mortgage in bitcoin any time soon. But blockchain is more threatening to financiers.
In response, banks have begun adopting the new technology.
HSBC and Goldman Sachs are among 20 banks that are backing companies that develop block- chain in an effort to embrace the change. Several start-up firms also offer direct payments services that cut out High Street names.
Transferwise, which is backed by Sir Richard Branson, allows people to send money abroad without i ncurring ordinary charges – although it recently got into trouble with the Advertising Standards Authority about claiming to offer the cheapest fees on the market.
Other smaller groups are getting in on the action.
London-based start-up GoCardless lets companies take regular payments, such as subscriptions or direct debits.
The other areas in which lenders were, until recently, untroubled is customer accounts.
When banking scandals engulf one firm, customers who wish to flee are often left asking whether any of the alternatives are actually any more ethical. But a new range of start-up banks are offering an alternative. As well as self- styled ‘challenger’ brands, such as Aldermore or Metro Bank, start-up lenders like Sterling Bank in London are of f eri ng non- t r aditional alternatives.
Sterling is led by Anne Boden, a veteran of traditional banking with UBS, Lloyds and Standard Chartered. Her new bank, which offers mobile- only services, is winning customers f rom older ri vals. Another, Osper, offers mobile banking for children, while allowing parents an overview of their offsprings’ spending through an app.
So how are banking giants, which spend billions every year on technology, being outpaced? Kartik Ramakrishnan from consultancy Capgemini said: ‘The financial services industry is one of the biggest spenders on technology. However, the majority of this spend is on maintenance activities, largely due to the investment required to keep legacy systems operational.’
Banks such as RBS that have grown through large acquisitions face particular challenges in knitting together creaking IT systems.
They can also only respond to changing trends with oil tankerlike sluggishness, while nimble start-ups can mould and shape their products very quickly. The only question that remains is whether the tankers will avoid the oncoming iceberg.