Reflections on the Past, Present & Future of the Banking Sector (Part 2)
In Part 1 of my reflections on the future of the banking industry, I spent most of my time discussing taxis. The taxi business is much simpler than banking but can none the less provide some very useful insights into how the financial sector will evolve. I essentially divided taxi drivers into four categories : 1) those who carry on business as usual 2) those who try to compete technologically with Uber and similar companies 3) those who join the “enemy” by going to work for Uber et al and 4) those who use the human dimension to differentiate themselves.
I argued that the first category would suffer a swift but painful death, that the next two would pass away in a more lingering manner and that the fourth category could not only survive but thrive. My example of choice for the latter was the London cabbie who can navigate better than a GPS , tell fantastic stories about his great city and offer a ride in a vehicle which, in spite of being uncomfortable, has become a cultural legend. In other words a trip in a London cab represents an experience which is much greater than getting from A to B.
If we now look at the banking sector we in fact discover that there are four very comparable categories with, in my opinion, similar destinies. The first category are the institutions which, although being aware of technological alternatives, grossly understimate their impact and believe that the future will remain difficult but that they will survive. They regard Fintech as a challenge similar to FATCA or Basel III, an irritation that will cause pain but gradually be treated and disappear. They are managed by babyboomers who treat technology as a cost rather than a life-saving necessity and who boast to their friends about how their grandchildren know more about computers than they do.
They console themselves with the argument that Fintech companies will gradually disappear as they become subject to the same regulatory environment as themselves, blissfully unaware that such constraints will become commodotised in exactly the same way as most banking services by the even newer Regtech sector. Such institutions, of which there are many, will almost certainly become extinct or at the best moribond within the next ten years.
The second category is the bank, usually large, which recognises the importance of technology and invests heavily therein either by recruiting Fintech experts or by acquiring Fintech companies. Their intentions are good but I believe that the cohabitation between the top management of the bank and the “techies”will prove problematic and that such structures will probably lack the agility and flexibility to adapt quickly enough to our brave new technological world. Many of them will survive because they have critical mass and brand recognition but the journey will not be easy either financially or culturally. They will have to invest huge amounts in keeping their technology up to date whilst suffering significant falls in revenue. The latter will be partially offset by the fact that compliance and regulatory costs will fall as they become mutualised or outsourced. But the impact on the profit and loss account will none the less be felt strongly by both shareholders and employees.
Carlos Torres Vila, the CEO of the Spanish bank BBVA, is a formidable precursor for the third category. Before being CEO he was Chief Technology Officer and his promotion is the strongest possible evidence of the importance this bank places on technology. Amongst many other interesting statements he asserted: “We want to build a portfolio of companies that are disruptive, that do things from scratch and can attack the incumbents, including ourselves.” In other words, as their Chairman Francisco Gonzalez recognizes, this institution will become a “software company” and a platform for the best Fintech companies for each activity of the bank. The bank even set up its own Fintech venture capital firm called Propel. And in recognition of the fact that traditional banks and Fintech companies do not always cohabit easily, this firm was spun off as a separate entity.
In my humble opinion, this is the correct path that most banks need to take. However technology evolves so quickly, and in a similar way to Moore’s Law, that even such an approach can be risky. How does a banking software platform like BBVA ensure that it offers the best technology to its clients in all its service and product offerings (deposits, loans, transfers, forex, wealth management…)? Well I believe that perhaps the most successful banks will be those that propose “open architecture”. In other words they will choose the best technology for each service at any given time in the same way that most private banks no longer limit themselves to offering only in-house financial products. This means that the relationship between the banking platform and Fintech application may have to be a commercial rather than proprietary one. If a bank acquires a technology or develops it in-house, it might become obsolete very quickly in which case the bank/platform will no longer be offering the best service to its clients.
If the institution does select “open architecture” this obviously raises certain other issues. Firstly the agreement with the provider will have to be reviewed in terms of legal and regulatory constraints to ensure that the client will be protected and that banking laws will be respected. The former will probably still need the expertise of a homo sapiens in the form of a lawyer but the latter will certainly be performed by some sort of robot. However above all this would create the need for a team to select the best applications in much the same way as banks currently employ teams to select the best third party products. And similary this selection team would explain the benefits of their chosen applications when necessary to the relationship managers who would continue to manage the relationship with a limited number of high-level clients. Alternatively, banks may decide that such investments in human capital are unnecessary given the marginal competitive advantage of changing applications on a regular basis.
And now we come to the fourth “London cabbie” category of financial institutions. About four years ago I was actually in London to see a few clients and candidates. One morning I had a meeting with two clients. My first meeting was with RBS Coutts. When I was at university in the early 80s, everyone’s ambition was to have a Coutts cheque book and credit card together with a banker dressed in top hat and tails. I arrived at the meeting expecting the taxi to pull up between horse-drawn carriages and a doorman in traditional attire to open the door for me. So imagine my disappointment when I was dropped off in front of a modern building without a carriage or doorman in sight. Interestingly enough, my meeting was with the marketing director who proudly produced his business card with the newly reintroduced royal crest and without any mention of RBS (whose acronym is unintelligble to most people outside Scotland). The seventeenth century Coutts brand had been relaunched and he was justifiably very proud. But more of this later after my second client meeting.
This second visit was to an establishment bearing the rather embarrassing name of Hoare & Co. As I boarded the taxi and stated the name of my destination I was dreading the driver’s sardonic Cockney reply and potential reference to Dominique Strauss-Kahn. But his reaction was totally professional and he duly dropped me at their Head Office on Fleet Street. Interestingly Hoare & Co was founded only a few years before Coutts but the impression on entering their office could not have been more different. Whereas the Royal Bank of Scotland had effectively decided to renounce the traditions of Coutts when they acquired the bank, Hoare & Co has remained a family-owned bank proud of its history. Indeed the first thing I saw when I entered the quaint lobby was an oil painting of their first client. Whilst a City regulator might have found this to be a breach of client confidentiality, I was totally fascinated by this piece of history and proof of continuity. I had the impression of being in a museum but perceived this in a very positive way. Indeed I was almost disappointed to see that the cashiers had access to computers and photocopiers.
When I was escorted to my meeting by the assistant I was led through a labyrinth of corridors containing shelves filled with ledgers. She explained to me that these were the banking records of all their clients dating back to 1672 : Samuel Pepys, John Dryden, Lord Byron, Jane Austen… As I entered the office of the CEO I was not sure whether to shake his hand or bow but then I remembered that the royal family banked traditionally at Coutts so I decided a handshake would suffice. The CEO then explained to me how the bank had retained unlimited liability and that all new clients had to be “vetted” by the family. I could have found this very antiquated and out of place in the modern world. Indeed the bank only introduced mobile banking in 2015. But my overwhelming reaction was a sense of wonder at the history of the place and a passionate but unrealistic desire to be accepted as a client. I thought back to Coutts and how they too were rebranding themselves, perhaps belatedly, to emphasise once more their marvellous history and tradition.
Just as a tourist will pay a premium to be entertained by a London cabbie or a Venetian gondolier, so too a wealthy client will be prepared to receive perhaps a lower yield in exchange for excellent service and a good “story”. This human dimension and generational continuity can never be replaced by an application or an algorithm. And other banks besides Coutts are beginning to realise this. When I lived in Paris there were two mythical names in the financial sector, Indosuez and Paribas. When Indosuez was privatised in 1986, they chose Catherine Deneuve as their emblem, the ultimate symbol of chic and beauty. Yet when the bank was acquired by Crédit Agricole twenty years ago, the new group completely abandoned the Indosuez brand in much the same way as Royal Bank of Scotland with Coutts. And both have reached the same conclusion recently (Crédit Agricole admittedly a few years later), namely that there is nothing to replace the brand value of tradition. Indosuez Wealth Management has been launched or relaunched.
When BNP acquired Paribas in 2000 they had what I believe to be the intelligence to retain the Paribas name even if the culture certainly disappeared. Interestingly in the same year Chase Manhattan acquired JP Morgan and, recognising that the latter was a stronger brand with a more prestigious history, elected to put JP Morgan before Chase in the name of the newly formed group. This is perhaps proof of the victory of American pragmatism over French pride but this is not something I would be prepared to put in writing. And talking about France, let us turn our attention to their neighbour and an institution which makes Hoare & Co, Coutts, Indosuez, Paribas and JP Morgan look like pubescent teenagers. Monte dei Paschi di Siena is the oldest bank in the world and was founded in 1472. Yet in 2013, after an IPO and a huge acquisition programme, the bank had to be bailed out by the Italian government. Instead of playing on its history and uniqueness, the bank fell prey to a modern curse called unbridled capitalism and is still looking to find its way to survive in an increasingly uncertain environment.
Perhaps the greatest name of all in the banking world is that of the Rothschilds. From humble beginnings in Germany in the mid-eighteenth century, the family created dynasties throughout Europe and became the richest family in the world in the nineteenth century. Not only did they create their own history but they also literally changed the history of the world unlike any other bank at the time or since (in today’s world the corporations who change destiny will almost certainly be in the technology sector). The Rothschild empire is still an outstanding name in several countries and it is interesting to see how the family seems to be divided between maintaining tradition and modernisation. I personally hope that the former will prevail. This will of course be reserved for the “lucky few” institutions who have a history to share and it will only be shared with a certain category of client. Some other banks may be able to invent their own differentiating story. But for the majority of banks and clients, the future will be all about three factors : technology, technology and technology.