For the last couple of years, I’ve started each year with a Top 10 list that attempts to predict what some of the key trends and issues will be in retail and commercial banking. I’ll do that again in January for 2020, but before the calendar turns, I wanted to look back and see how my predictions for 2019 turned out. Was I prescient on key issues or wildly off the mark? Even more importantly, what conclusions can be drawn from the evolution of the industry this year?
1. Cracks are beginning to show with unbundling and fragmentation.
Once upon a time banks wanted to be vertically integrated, managing everything from the regulated balance sheet to distribution. We predicted that this year we’d see banks become increasingly horizontal. Partnerships and collaborations certainly grabbed headlines, like Citi’s deal to offer checking accounts through Google and Goldman Sachs’ launch of the Apple Card. There have also been less-heralded shifts, Uber’s extended push into financial services and the surging payments-led growth of South East Uber-like services like Grab and Go-Jek. In the words of one attendee at Money 2020, banking is moving “from a plate of spaghetti to a lasagna, with some clearly defined layers.” In 2019 the cracks in the traditional vertically integrated banking model certainly widened.
2. A “Future Premium” for some. Is this the year profits, as well as value, diverge?
4. U.S. community banks are heading into a twilight.
The end of U.S. community banking will not come quickly, as the disruptive forces are compressive rather than explosive. But 2019 confirmed it is coming. Despite very positive macroeconomic conditions, the sun continues to set, as predicted. FDIC data shows that both asset and liability growth for banks with less than $10 billion in assets trailed the overall industry, indicting continuing market share declines for smaller banks. Even though profitability did increase – with return on assets the highest it had been for community banks since 2006 – net income growth still trailed the larger banks. And while community banks posted a 5% increase in M&A in 2019, their premiums slipped from 175% of book value in 2018 to 155% this year.
5. The Chinese are going international.
The stunning growth of Chinese digital payments continued in 2019, but there was also more focus on overseas expansion with a myriad of acceptance deals for WeChat Pay and Alipay in the West plus continued investment in developing markets like India, where Ant invested in Paytm, and Brazil, where Tencent backed Nubank. There’s also been much speculation about Ant offering a full Banking-as-a-Service proposition to partners in markets outside of China and the People’s Bank of China launching a digital central bank currency that could trump Libra. The latter could be a true digital payments game changer. While regulatory activity increased in China, particularly around credit quality and sketchy P2P lending, 2019 played out pretty much as we expected. The Chinese are still coming.
6. The tipping point for fintechs in the United Kingdom.
It looks like the UK banking market has reached its fintech tipping point. Accenture research suggests there are now over 18 million challenger bank accounts in the UK with a sharp trajectory towards more than 25 million – in a nation of less than 70 million people. Younger consumers are enthusiastically embracing banking alternatives, with 40% of those under 25 in the UK now multi-banked. While the majority of challenger bank accounts are secondary accounts, we are seeing average balances tick up. Fintechs still have work to do in their home market to turn customer numbers into profitability, but these challengers now look like a long-run part of the banking industry in the UK. Another sign the UK is past the tipping point is that leaders like Revolut and Monzo have turned their attention to international expansion, including launching in the U.S.
7. We’re seeing the beginnings of build and migrate systems.
There were a bunch of announcements in 2019 of major banks looking to build new core banking systems with third-generation providers. New core banking players went mainstream and started to compete not at the edge of banking but in the middle of it, showcased by the moves of Westpac and JP Morgan Chase taking equity stakes in 10x Technologies. We also saw progress in the U.S. by Finxact, the Sanchez brothers’ new core banking platform (which Accenture has a stake in). 2019 was the year the real systems building started. Migration is going to follow, not as a big bang all at once, but in a measured and inevitable shift to cloud-native core banking systems.
8. Everything moves to the cloud.
Cloud migration matured very quickly in 2019. It was certainly noticeable how much time U.S. bank CEOs spent discussing their cloud strategies in their latest round of earnings calls. Some of that is tech strategy grandstanding, but it also reflects the increasing importance of cloud strategy within their management teams. As I predicted, cost reduction is no longer the primary driver. Instead, business cases have shifted to application consolidation, shorter development cycles, and leveraging the data and analytics capabilities of cloud. We have also moved rapidly away from the idea of banks having a high-profile single-vendor public cloud partnership to a realization that a hybrid cloud approach is suitable for most incumbent financial institutions. Despite the best marketing efforts of the major cloud service providers, a hybrid cloud approach is now the dominant architecture choice for banks. Regardless, it’s still early days: three-quarters of the banks in a recent Accenture survey have migrated less than 30% of their applications and 64% of clients expect to have less than half of their applications in the cloud three years from now.
9. Time for big tech to make its move … the chess clock is running down.
I noted in January 2019 it was time for big tech firms to make their moves in banking. They started with the Apple card announcement, Google checking with Citi, and Libra from Facebook —all plays that extend the reach of big tech into banking. The much-hyped Amazon white-labelled checking account didn’t happen, but they did launch a new credit card for the under-banked and continued to build a suite of niche banking products to serve their customers. Not everything went well for big tech though and the hostile regulatory reaction to Libra should be cautionary. If big tech gets too close to the heart of the banking and payments industry, then the regulatory antibodies will kick in and make life difficult for them.
10. Welcome, “platform” police.
The word “platform” in the banking context has become meaningless, but unfortunately, the platform police didn’t show up as I had hoped. The number of mentions of banking platforms in the press increased from just over 1,000 per quarter in early 2019 to over 2,000 for the last three months. The word is still being used in vague terms to describe many things that are not traditional banking and the more that true big-tech platform players like the Uber and Amazon build out their financial services product offerings the more it could proliferate. But it’s more than an annoyance. Use of ‘platform’ remains a lazy way for many bank strategists to describe any business model that lacks specificity and clarity which isn’t traditional banking. That doesn’t help anyone, least of all investors.