Traditional banks are haunted by financial technology—fintech—firms. Challengers such as mobile-first banks Chime in the US, Monzo in the UK and Germany’s N26 have been around for a number of years now, but big global and regional banks are still struggling to deal with the competition. While fintechs experience a goldrush of investment—US$111 billion in 2018, up from US$51 billion in 2017—banking CEOs find themselves under increasing pressure from shareholders alarmed at the slow rate of change taking place.
In our conversations with senior managers of banks, we spot several blind spots which are often found among incumbents who get hit the hardest by disruption. Two stand out in particular: an over-reliance on existing competitive advantages and an inherent misunderstanding of what disruption really means for them.
Traditional banks have a few advantages that they believe will protect them from the fintech threat: branch coverage, the trust they enjoy from customers and government regulation. But these advantages are eroding rapidly.
According to international consultancy firm McKinsey, in the past decade, the top 25 US banks managed to grow deposits while reducing their branch footprint by 15%. Clearly, having a physical branch in every neighborhood is no longer necessary to drive customer deposits, as well as engagement.
Following the global financial crisis and bank bailouts, trust in the banking system was irrevocably shaken. Arguably, tech companies such as Amazon, Google, and Apple enjoy more trust from the global consumer than banks. With billions of devices and services from these companies already holding banking data and payment access in the form of apps and mobile wallet cards, customers seem to have already moved their financial transactions.