The fourth global retail banking report from The Economist Intelligence Unit finds an industry in flux but more certain about its future.
In previous years, banks feared that financial technology (fintech) firms would steal all their lucrative business lines. But domination is harder and more expensive than assumed. Fully automated banking may never happen. Although retired investors love Skyping their grandchildren, they do not want to talk finance with a chatbot.
So incumbents and fintechs must learn to mix old and new. Collaboration might even make us love our banks.
To measure how traditional players and fintechs can co-exist, The Economist Intelligence Unit surveyed 200 senior retail banking executives about regulatory, customer, security and technology influences on the industry up to 2020.
Amongst the findings were a number of recurring themes:
The regulators will decide. Capital and compliance will shape incumbents and newcomers alike. Domestic regulators warn fintechs not to expect an easy ride.
Into the unknown. American banks worry about regulation the most, despite a promised rollback. European policy direction is more certain, yet onerous. Geopolitics do not help.
Resistance is futile. The EU's Second Payment Services Directive and open architecture are the game changers. Banks may lose their customers' loyalty, fintechs could hit compliance barriers. Both must collaborate to survive.
Complacency is not a virtue. Fear of peer-to-peer lenders and robo-advice may have peaked. Non-banks could still steal deposit and lending business—and profit—unless banks improve the customer experience.
No cash, no cheques. If they are smart, banks may still win the war to build truly universal digital networks.
The shape of tech-dominated retail banking is becoming clearer. By 2020 your bank may no longer manage your real-time digital transactions nor your new account opening, but it will still lie at the heart of your financial world.
Fintechs' dreams of disrupting the entire banking industry may disappoint. Retail banks still hold—and will retain—a huge advantage. They have three "big Cs" on their side: customers, compliance and capital.
The big banks have tens of millions of trusting customers who interact with them every day. Successful fintechs may have only tens of thousands of customers and few primary banking relationships.
Bankers and their well-established legal teams also have decades of compliance experience. The lawyers always win, no matter what.
Crucially, the banks have a cost of capital close to zero. Fintech companies generally have much higher costs because of their capital funding structures. With profits finally rising, banks can afford to build expensive defences.
In that light, the competitive moat seems more like an ocean. Yet established banks generally still fail to create a good user experience. They have much to learn from the fintech providers—consumers want service at their fingertips. Today that type of service can be delivered via our smartphones, making it increasingly easy to breach the barriers between distribution and technology.
The solution is simple, on paper at least. Rather than hand-to-hand combat, banks are learning to love fintech in the hope that it will lead us to love our banks, too.
This strategic U-turn by traditional banks has been quick—less than 12 months. However, building a loving, symbiotic relationship may take a little longer.
For more details, statistics and comment from 36 senior execs from banks, fintechs, VCs and more, read the report in full.