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 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.”
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.
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.
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