Antony Jenkins, the former CEO of Barclays, has a nightmare vision for the future of big banks.
In a speech in London this week he said: “The incumbents risk becoming merely capital providing utilities that operate in a highly regulated, less profitable environment, a situation unlikely to be tolerated by shareholders.”
Jenkins says a series of Uber-style disruptions in the industry could shrink headcount at traditional big banks by as much as 50%, while profitability in some areas could collapse by over 60% — huge predictions from a man who, until recently, ran one of Britain’s biggest banks.
He adds: “In my view only a few [incumbent banks] will have the courage and decisiveness to win in this new field.”
The problem? Financial technology, better known as fintech.
Jenkins, who was ousted as Barclays CEO in July, says a new wave of tech-savvy startups that can do things better, faster, and cheaper than the big banks will disrupt their traditional businesses like lending, payments, and wealth management.
He isn’t alone in thinking this. A survey by software firm Temenos released on Thursday found 27% of senior bankers named tech companies as the biggest threats to their businesses.
In fact, we’re already seeing it happen with startups like Lending Club and Funding Circle (lending), Square (payments), Nutmeg (wealth management), and TransferWise (international payments) — all of whom Jenkins name checks in his speech at Chatham House.
Jenkins recently visited Silicon Valley to hobnob with fintech types out there and it’s convinced him that financial services are about to be disrupted in the same way publishing, telecoms, and the music industry have been.
We will see massive pressure on incumbent banks, which will struggle to implement new technologies at the same pace as their new rivals. That will make it increasingly challenging for them to deliver the returns and profitability that their shareholders demand.
Ultimately, those forces will compel large banks to significantly automate their business. I predict that the number of branches and people employed in the financial services sector may decline by as much as 50% over the next 10 years, and even in a less harsh scenario I expect a decline of at least 20%.
A halving of headcount and branches over 10 years! That is a huge decline. The prediction coincides with reports that Lloyds is poised to axe 1,000 jobs as part of branch closures and increased automation.
Jenkins also quoted research from consultancy McKinsey that technology will wipe out two-thirds of profits from things like retail lending, car loans, and credit cards.
So why are banks suddenly facing a swarm of new tech businesses eating away at their businesses? There are 2 big factors.
Firstly, the 2008 financial crash. Not only did this lead to a mistrust of big banks, making people more willing to embrace startups, it also led to a huge number of redundancies that meant there were a lot of smart people who understood the world of finance looking for something new to do.
The 2008 crash also led to a big increase in regulation, which has forced banks to take their eye of customer needs.
The second reason is the cost of starting a technology business has come way down. It used to be conventional wisdom that it would take $50 million to get a software business off the ground — at least half of that would go on server banks.
But the advent of cloud computing, that lets you pay for space as you go, and the rise of APIs, which let you buy out-of-the-box tools you can just connect together to make your product, has bought the cost way down. A report from CB Insights earlier this year estimates that the cost to launch a startup had fallen to just $5,000 by 2011. (This seems a little optimistic for fintech. Another figure I’ve heard quoted for a fintech startup today is $2 million.)
But while Jenkins is pretty pessimistic about the prospects for big banks in the future, he doesn’t think the Apocalypse is here just yet.
He said: “I would see much of the fintech activity as version 1.0. Some would even argue there’s not that much tech in some of these fintech companies.
“While there is a burgeoning fintech scene in the UK, we’re still waiting for truly transformative projects. But with the tsunami of capital working in the sector we cannot be far away.”
So how can big banks stop their dinner being eaten by nimble startups? Jenkins says:
Incumbents will need address 3 significant issues. First, boards will need to accept that we live in a discontinuous world. They should ask executives to take significant but calculated risks by working on projects that no one else is working on. Looking for a linear progression just won’t cut it.
Secondly, there shouldn’t be a technology strategy. There should only be a strategy with technology at its core. There’s a huge difference. And thirdly, leaders need to lead differently. In my experience, people become more risk averse the more senior they become. But doing the same thing a little better is now the riskiest thing you can do.
In fact, pretty much every big bank has made technology a priority in one way or another, either by tapping startup expertise like UBS or by experimenting with systems and technologies internally.
Just under a third of Goldman Sachs’ employees are now engineers — 11,000 — and its big projects at the moment include messaging platform Symphony, an online peer-to-peer lending platform, and Marquee, an “app store” that lets clients use its internal trading a modelling tools for a fee. Thousands of clients are already using it.
58% of senior bankers polled by Temenos said they plan to spend more on IT this year, the highest percentage since the survey began in 2008.
The big question, as Jenkins points out, is whether these huge institutions can move fast enough to get ahead of the wave of change — or at the very least ride it.
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