Digital Disruption: Mortal Danger for Big Banks?

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Perhaps nothing is more core to contemporary economical systems than the bank

Long seen as a powerful stabilizing force, banks provide a reliable source of capital and ensure our money is safe and accessible. However, banks are facing challengers of a digital nature, as startups relying on new technology are pushing to change the face of banking as we know it. Will digital disruption strike a fatal blow to banks?

Disruption in the US and Canada

Accenture recently studied the impact of new entrants, nearly all of which are digital disruptors, on banking systems in Western regions. In the United States, 19 percent of financial institutions were classified as new entrants. In total, they captured approximately 3.5 percent of banking and payments revenue. This number might seem low, but it comes in a climate where 25 percent of financial institutes have disappeared over the past 12 years, largely due to the financial crisis and a challenging regulatory framework for attaining a banking license. Among new accounts in the United States, more than half are opened with the three large banks, all of which are making significant investments in digital technology. Regional banks and credit unions are instead focusing on reducing costs, and they’re struggling to keep up. Across the border, 47 percent of banking and payments institutions in Canada are classified as new entrants. Despite this large number, these organizations have captured less than two percent of total banking and payments revenue, making Canada one of the least disrupted markets.

Europe and the UK

Across Europe, including the UK, new entrants comprise 20 percent of banking and payments organizations. In total, new entrants have captured nearly seven percent of total banking revenue, showing that digital disruption has found a major foothold in banking across the continent. Perhaps even more impressively, they’re captured approximately one-third of new revenue since 2005, showing they can succeed in both strong and weak economic environments and are poised to grow in the coming years. In the UK, a staggering 63 percent of banking and payments institutions are new entrants, thanks in large part to regulations increasing competition in the financial services industry. This is in contrast to a global average of 17 percent. These new entrants captured 14 percent of total banking revenue, and 12 percent of that went to non-bank payment institutions. Like their continental counterparts, new entrants in the UK are capturing approximately one-third of of new revenue, again suggesting a strong future for companies able to bring digital disruption to financial services.

What Does Disruption Look Like?

Banks are among the most highly regulated institutions in nearly all nations, and for good reason: Banking failures can destroy an economy. Furthermore, Accenture’s results show just how difficult analyzing the effects of disruption on the industry can be, as countries with more new entrants aren’t necessarily the ones seeing the most money move to newer entities. Incumbent banks often point out that new entrants aren’t seeing significant revenue, an argument that Accenture’s analysis refutes. They also claim that these entities aren’t profitable, an argument not addressed by Accenture. The third claim made by incumbent banks is worth consideration: Incumbents aren’t actually innovating but are instead repackaging traditional banking products with new branding. Determining what disruption looks like requires a deeper view of banking systems as a whole.

The Impact of Fintech

One of the most clear areas where disruption has an undeniable impact is Fintech. Fintech has largely been viewed as technology used for backend tasks by leveraging digital technology to provide more efficient and smarter transaction handling and customer data management. In an era where customers are spending less time in physical banks and more time banking online, these technologies have changed how all banks, both new and traditional, are functioning. Newer entities have also played a major role in how payments are made and processed. Payment apps, many of which are run by newer entities, are becoming de facto standards in many parts of the world, and their impact in less developed regions has been transformative. New entrants will have to prove their value while competing against their more traditional counterparts, who are increasingly leveraging the technology used by would-be disruptors.

Due to regulations and the high stakes involved, banking is a field that moves at a relatively slow pace. In spite of this, change is coming to banks, and new entrants are having a substantial impact. Despite the core function of banks to society, studies consistently show little similarity between banks in various regions. Disruption is coming to banking, but the nature of this evolution is difficult to gauge.

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