The increased use of technology for banking will continue to threaten traditional banks – especially in payment processing. Several articles over the last few weeks highlight the need for banks to think strategically and smartly over their digital strategies. And with whom they might consider partnering for the future. There are no easy or obvious choices making it a difficult time for bank management.
In the US there are increasing numbers of digital entities that are securing banking licenses allowing them to take deposits. The Financial Times reported early this month about the first digital entity that has received a national banking license. Varo received this license whilst others such as Chime have chosen a route that partners with existing banks. As reported this week in the Financial Times, it appears that Google will follow the partner route. But as with all digital companies, the question should always be how long will they continue to want to be just a partner and not own the client relationship. Or will they find a way to only pick off the profitable elements of the client relationship and leave the rest with the partner bank. In any case all banks need to think clearly about the threats and opportunities in digital banking and their approach to investing in this area.
Meanwhile in Europe there continues to be significant merger and acquisition activity in the payment processing space. This area has been perhaps too quickly abandoned by traditional banks as reported yesterday in the Financial Times. Over the last several years payment processing companies originally owned by banks have been spun off and subsequently purchased by private equity investors. These investors are now involved in rolling up these investments into larger entities that can benefit from economies of scale. Most likely banks should be as afraid of private equity as they should be of technology companies.
Meanwhile in Europe the impact of COVID-19 has impacted the client relationship process for many banks. Europe has been somewhat slower about reducing branches but the impact of the virus has created change. As reported in the Financial Times, older clients that have been hesitant to take on digital delivery of banking services including advice via video conferencing are now much more willing to speak virtually with their bank to reduce health risks. This change comes with the risk that communities will lose the value of bank branch personnel that know the local economy as well as leaving behind the portion of the older population that does not or can not adjust to the new technology.
