“Bill Gates was unfortunately wrong. Of course Too Big To Fail Banks can survive the digital age, but only because government guarantees (deposit insurance, government mortgages, historical bailouts of big banks) and the voluminous and costly regulation that follows, massively distort the marketplace preventing new and innovative digital competitors from emerging and/or succeeding.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Big Banks Can Survive Mobile Ice Age
Mobile Technology Won’t Kill Large Lenders, but Smaller Ones May Struggle to Adapt
By John Carney
Financial dinosaurs haven’t gone extinct. They have just gotten bigger.
Two decades ago, Bill Gates described banks as “dinosaurs” that would be bypassed by innovative technology. Yet since then banks have survived challenges from personal-finance software, early virtual banks and the Internet. Now, there again is talk about banking being disrupted. Money is pouring into financial technology startups. The initial public offerings of LendingClub and On Deck Capital were wildly successful.
The introduction of Apple Pay appears to be on the way to making mobile payments mainstream. A recent Capital IQ report declared 2015 will be the year mobile-payment technology “finally achieves widespread acceptance.”
Have we finally reached the extinction event for banking dinosaurs? Not by a long shot.
One of the lessons of recent years is that the dinosaur metaphor is inapt for banks. They have proved more resilient than other businesses swamped by technology.
Because banks control the payment system, they are like the underlying terrain on which all the other economic animals run. Disruption tends to occur over them, not through them. That is likely to be the case again for big banks. Smaller, regional ones may be overwhelmed.
Take Apple Pay or PayPal. Both essentially operate on top of incumbent banking and credit-card systems. No matter how successful Apple Pay is, customers will still need to link it to credit cards or bank accounts. LendingClub, too, is dependent on banks: 87% of its net revenue in 2013 came from banks that originate its loans.
As mobile banking becomes more widespread, banks with the largest, most robust networks will benefit. Banks that can afford to invest in technology will be rewarded. And those with the biggest customer bases will be able to drive the best bargains with newcomers like Apple Pay. J.P. Morgan Chase , Citigroup , and Bank of America already are far along as early adopters of mobile technology.
What’s more, the biggest banks have capital markets and advisory businesses that make them less dependent on the ordinary banking business whose margins may be squeezed by new technology competitors.
In its recent report, S&P Capital IQ predicted nearly “all bank branches and other brick-and-mortar financial-services locations will shrink or close in the next few years to be replaced by virtual offerings.” That likely overestimates the impact of mobile disruption and underestimates how branches can adapt.
Still, banks’ physical footprint is losing value. A recent study by Accenture found 27% of bank customers would consider switching to a branchless digital bank. Among 18- to 34-year-olds, that number is 39%.
This puts local and regional banks in a bind. They have fewer resources to build up their own networks and lack bargaining power to drive hard deals with third-party platforms. And the declining value of the physical footprint also will mean they are less attractive takeover targets. Bigger banks will see better rewards from investing in technology rather than new branches.
Widespread adoption of mobile payments and digital banking will change the climate, possibly submerging some smaller banks. The biggest ones, though, aren’t likely to succumb to a rising technology tide.