Some 20 years after Bill Gates confidently predicted that banks would become dinosaurs, traditional banking executives still roam the earth.
But by the year 2030, that may no longer be the case if analysts with Gartner are correct. In 11 years, Gartner predicts that “80% of heritage financial firms will go out of business” or become so commoditized that they only exist in a nominal sense.
This bold proclamation is not without controversy nor detractors. Soon after Gartner’s prediction hit the internet, international banking commentator Chris Skinner, blasted the firm’s logic and its conclusions.
“A lot of banks are stuck in last-century thinking, with last-century leadership running last-century systems from last-century vendors,” Skinner says. “But to claim that four out of five of them will be replaced by new systems and new vendors and new players by 2030 is just huge claptrap. It ain’t gonna happen.”
Skinner believes there’s a future for traditional banking providers as long as consumers remain stuck in their ways.
“Most banks may have last-century thinking, but they are dealing with last-century customers,” he says.
Skinner argues that inertia continues to be a force more powerful than many disruptors in the fintech chorus would have one believe.
As skeptical as Chris Skinner sounds about Gartner’s projections, he clearly has mixed feelings. Writing later about an experience he had trying to open his own business banking account, Skinner recounts an odyssey of unfortunate events, including multiple visits to different branches, an array of inflexible policies (including a Catch 22), and a complete lack of flexibility. He never did get his bank account opened.
“Big old banks have such archaic, Jurassic account opening processes, I cannot believe they can stay in business,” he griped somewhat ironically.
Alas, Skinner’s seemingly contradictory points of view illustrate how difficult it can be judging the impact and pace of change in banking.
Is Banking’s Future Really That Bleak?
Whether you agree with Gartner’s assertion or not, the report on which their conclusions are based should be seen by everyone in banking as a call-to-arms.
“Executives in the banking industry should push their organizations for a more coherent response to digital business,” Gartner’s analysts recommended in their report. The only way to survive and be one of the few institutions still standing is to recognize the need to evolve and act on it.
Gartner’s report makes these key observations:
- Accelerate digitalization. Traditional financial institutions may not have time to change their business- and operating models once “network effects” kick in.
- Megabanks and “platformification.” The industry’s largest players could survive by building digital platforms and supporting ecosystems to drive scale. Gartner suggests that large players could permit smaller players like community banks to participate in some way.
- Scale matters. Midsize and regional firms should buy or merge their way to size to the platform league. They should also exit low-return businesses and concentrate on high-return businesses that would reside on bigger player’s platforms.
- Small players must transform. Small players should sell off commodity businesses and become nimble fintechs.
Gartner insists that despite all the innovation labs and such, many traditional institutions still aren’t really transforming digitally. If they indeed are, the pace must pick up significantly. Gartner says that many banking providers foolishly believe they aren’t in jeopardy because their digitalized competitors aren’t making major inroads… yet.
Can The Industry Change So Drastically Such a Short Time?
Jim Marous, Co-Publisher of The Financial Brand, actually believes future Gartner envisions for the banking industry will come true sooner than 2030.
“The banking industry will be significantly different way before 2030,” says Marous. “First of all, thousands of small- and medium-sized institutions that have not become digital organizations will cease to exist. Many are not keeping pace with consumer needs, and this is a recipe for failure.”
Veteran consultant, regulator, and now regtech guru Jo Ann Barefoot believe Gartner’s concerns are justified. She says the impact on the banking industry has been modest and gradual to this point, but the warning signs are clear — things could change radically and quickly. Barefoot sees the convergence of tech trends and demographic shifts producing tectonic shifts.
“That’s the nature of the change underway in finance,” she explains. “It’s evolving slowly in plain sight, but has entered into an exponential, ‘hockey-stick’ acceleration driven by the exponential growth of technology in all sectors.”
Joe Sullivan, CEO at Market Insights, wonders if Gartner’s “2030” claim isn’t just a savvy PR play.
“Provocative predictions like this are good at generating buzz, but often give greater emphasis to the speed of technological change than to the evolution of consumer behavior,” Sullivan says. He agrees that digital technology continues to dramatically and rapidly change the industry and its environment, but not as quickly as Gartner believes.
“The disruptive impact of technology will continue to be moderated by local and regional variance in consumer needs, preferences, and expectations,” Sullivan explains. Financial life can be very different outside of urban markets, he points out. “The future is already here, it’s just not evenly distributed.”
“Add the complications of U.S. regulation and it’s clear that it will take more than a dozen years to see the kind of change Gartner projects,” Sullivan concludes.
Something that often gets left out of the picture when people discuss banking’s future is the entire commercial side of the business. The future of the industry can’t be predicted without considering that. “Relationships there are often initiated and maintained personally, rather than digitally,” says Sullivan. Business banking, a key part of community banking and even of a growing number of credit unions, is not digitizing at the same rate as consumer banking.”
Ron Shevlin, Director of Research at Cornerstone Advisors, also finds Gartner’s claims somewhat dubious. He agrees that the industry will change dramatically and drastically by 2030, but contends that the notion that 80% of the industry will disappear is “unverifiable and unprovable.” Futhermore, Shevlin argues that a large percentage of banks have already been commoditized, so what’s new?
Some industry analysts like J.P. Nicols, Managing Director at FinTech Forge, call Gartner’s projection “directionally correct,” but thinks it’s too severe — the perspective is too black-and-white. It reminds him of the Dot Com Bubble of 20 years ago.
“There were some massive winners, like Amazon,” Nicols recalls. “But there were also plenty of bets that went wrong. It will be much easier to predict the losers than the winners, especially this far out.”
Even so, Nicols thinks it’s silly trying to quantify the death toll in hard numbers. The U.S. still has thousands of banking players, and many are closely held, often family-held operations.
“They could hold out for quite a while, even under sub-optimal conditions,” Nicols says, “regardless of what macro-optics might suggest.”
Legacy Survivors and The Platform Approach
“The banking ecosystem will be completely transformed by platformication.”
— Jim Marous, The Financial Brand
“The banking ecosystem will be completely transformed by platformication,” says Marous with The Financial Brand. “Using open APIs, financial institutions will expand the array of financial services provided — as well as other services outside of the current banking landscape. And the movement to platform banking will also allow organizations to be providers to other financial firms, as a way to survive.”
Ron Shevlin says he’s a firm believer in the platform idea as a business model like Amazon, not as a technology construct. To generate scale and information through a platform requires a change in strategy and business model for today’s bank. It’s not as simple as just ‘owning’ a digital platform.”
J.P. Nicols says that only a very small number of institutions can legitimately claim to be major platforms today. “Think BBVA, JPMorganChase, Capital One,” he says. “Getting this done takes both scale and managerial mindset. Very few have both. Those institutions, and a handful of others, are already moving towards this, with investments in APIs and open banking platforms.”
Market Insights’ Joe Sullivan agrees, and thinks others will soon follow. But does this mean traditional players will be extinct in 11 years? “No,” Sullivan insists. “There is a big difference between platforms replacing systems and platforms replacing traditional players.”
Picking up on this point, Shevlin points out that Amazon has actually enabled many smaller merchants to thrive. He contends that a similar development in banking could enable hundreds, if not thousands, of banking providers to co-exist harmoniously. “In that platformification scenario, claiming that ‘80% of banks will go out of business’ would be 100% wrong.”
Nicols points out that the industry has already developed an exaggerated barbell structure — very large players with a huge share of assets on one end, and lots of small players on the other, with a very skinny middle.
“Small and customer-intimate institutions versus large institutions with scale and scope,” Nicols explains. “Over the long run, it’s going to be increasingly difficult to survive anywhere in between.” Akin to a platformification model, Nicols suggests that the smaller community banks and credit unions could be supplemented by fintech players and pure digital institutions.
It’s also quite possible that some unforeseen factor could potentially shift the outcome in an entirely different direction.