Banking Is More Than Software
Disruption is the current name of the game. The promise is it will upturn any economic sector that’s not sufficiently hip to the new ways of doing business. In some cases that has certainly been true. Uber has taken its toll on traditional taxicab companies. Airbnb has altered the hotel and bed-and-breakfast sectors.
And in the world of finance, the promise that fintech will wipe out traditional banking sounds exciting — but doesn’t really stand up to scrutiny.
This isn’t too surprising. Proto-banks have been around since 2000 BCE and a bank founded 20 years prior to Columbus sailing west from Europe — the Banca Monte dei Paschi di Siena in Italy — has operated continuously ever since. Seeing how it’s been able to survive pretty much the sum total of technological change over three millennia of human civilization, banking is not an enterprise so easily disrupted.
The fact is traditional banks already have millions of customers who have a 24/7/365 relationship with their bank. Entrusting one’s money is not like catching a ride downtown or a weekend getaway. The baseline level of anxiety the customer brings to the relationship is a little more intense.
The few digital banks that have gotten up and running, like the UK’s Monzo and US’s BankMobile, cannot serve the full spectrum of consumers. They concentrate on a subsection of millennials and are nowhere near being able to serve, much less attract, the other demographic groups that make up the vast majority of bank customers.
Here are nine reasons to bank on traditional banking over the long-term:
- There Are Still Lots of Low-Tech Customers: Though it’s hard to believe, not everyone loves doing business on the Internet. Banking is a universal requirement in a capitalist economy and requires a universal delivery method, one that takes into account that not everyone will behave in a way most efficient for the provider.
- All Banking is Local: Well, not really. But Tip O’Neill’s famous quip about politics (“All politics is local”) is worth remembering. A homegrown bank has a method of data gathering — namely, personal interaction and local understanding — that startups located “in the cloud” will never be able to match.
- The Personal Touch: For most customers, there comes a time when big, emotional moments involve their bank — mortgages, small business capitalization, dealing with a death in the family — and many (if not most) customers want face-to-face contact during these moments. In emergencies or other high-stress situations, “talking” to a chatbot just doesn’t cut it.
- Fintech Is Focused on Niches: The new tech-dependent banks that have launched — most of which are in Europe — start without any customer base, are weakly capitalized compared to traditional banks, and have no reputation to ease the minds of potential clientele. This is why they focus on niche markets and don’t attempt to provide the vast array of services that traditional banks deliver.
- Regulation Is Not All Bad: Though most bankers may not freely admit it, a little “over the shoulder” oversight by the FDIC helps lend long-term stability to traditional banking. Fintech is still operating in a “wild west” scenario and most people want their money to be safe, not exciting.
- Artificial Intelligence is Amazing (But Not That Amazing): Much of the hype about fintech is the potential of AI to transform trading and money management. But AI is probably not nearly as well understood or omnipotent as it’s made out to be. There are things AI can do. But maybe not everything the hype says it can do.
- Banking Is More Than a Mobile Wallet: One thing that fintech has led the way with is mobile payment options. Cash is needed less and less by people who are comfortable paying for everything by swiping (though not everyone is comfortable with that). But ultimately the money that these “virtual” transactions represent still has to be, for lack of a better word, warehoused somewhere — and made available for transactions where mobile payment is not an option. That’d be one of the things traditional banks do.
- Co-opting: One reason banks have been such a stable presence over time is that they are highly adaptable — and not at all incapable of assimilating new trends. Mainstream banks may have been a little slow off the tech blocks, but the rise of bank-sponsored hackathons, fintech venture capital funds, and other support for tech adaptation is proof that traditional banks aren’t going to simply give up.
- Beware the Bubble: We’ve seen this story before. The dot-com bubble of the late 1990s was thrilling and full of promise. Thousands of new cutting-edge companies were created — and most of them crashed and burned by 2002. Customers are not keen on their banks crashing and burning.
Ultimately, new tech is simply a new tool. One that traditional banks will no doubt continue to adapt as part of their operations, long before they can be truly disrupted.