Rising from the Ashes of the 2008 Meltdown
For decades now, banks have leveraged governmental financial regulations that prevent new entrants to easily come in and disrupt their businesses. However, after the 2008 housing bubble, consumers have lost trust in big financial institutions. Distrust for big banks and tech advancements like Cloud computing, open source softwares, encryption and machine learning has proven to become a perfect storm for FinTech startups to rise to the occasion.
A wave of innovation has made it possible for people to get their banking done without walking into a branch if they don’t want to. People can now deposit checks using a smartphone or digitally do transactions through various mobile wallets. This poses an imminent threat to people working in banking institutions but in return offers a sweet experience to consumers.
A clear downsizing trend can be seen in various banks across the world due to automation taking over mundane jobs. According to a new Citigroup report, the bank workforce is still facing a problem as the downsizing is predicted to accelerate as more technology takes over jobs humans used to do. Around 30% of the jobs are expected to be lost in the banking institutions mainly due to retail banking automation.
“Fintech is forcing banking to a tipping point,” Citi said.
One of the main reasons is the ease of transactions which can be done easily through smartphones for which 5 years ago, one would have to stand in a queue of 20 people just to deposit cash in your bank account. The banking information systems are awful especially in India which hasn’t gone through a change for the past 30 years. Most of the transcations are programmed in the 1959 COBOL language.
The Citi group report further says that the US and European banks will shed 1.7 million jobs by 2025 as the banking sector undergoes its own “Uber moment”.
Fintech: a disruptive sector
Lending and payments are the two areas where fintech companies have attracted significant capital investment. 46% of private funding for fintech companies was for lending, while payment gateways accounted for 23%.
Both areas have been lucrative for banks with lending currently accounting for 56% of the profits generated by the banks. But while new peer to peer lending companies have brought in a lot of venture capital, they still account only for 1% of global loans. Similarly new business models in the fintech sector have displaced just 2-3% of consumer banking revenues in the US and even less in corporate banking. But the storm has just started.Banks could lose up to 60 percent of their retail profits Fintech companies according to Mckinsey & Company.
The consulting firm further claims that the changes coming over the next 10 years will be less visible than the global financial crisis or the dot com bubble but the impact of those changes on the banking economics and fundamental business models will be highly substantial.
There is no denial that the fintech sector is booming. According to Accenture, global investment in Fin-tech ventures tripled to US $12.21 billion. Although the digital revolution in financial services is under way, the impact on existing players is still unclear.
The current Digital disruption has the potential to wipe out back-end roles in banks through automation and simultaneously help them create better, faster, cheaper services that would make these businesses an even more essential part of our everyday lives.
In addition, banks are under pressure to automate more back-office processes which will also result in job cuts. There seems to be no way out for the bank workforce.
Banks emulating Fintech
Now the real question is, what can the banks do to avoid such disruption?
Acquiring small fintech companies in order to meet the demands of the digital economy seems to be the answer. Banks have already started to catch disruptive trends as they are aware of the benefits of the agile nature of small businesses. British banking giant Barclays recently bought payment and loyalty specialist Logic, while France’s Credit Mutuel Arkea bought payment specialist Mangopay. Banks are not as rigid as they were a decade ago. They know that in order to stay in business, they need to emulate what financial tech firms are doing. Aviva for instance has a ‘digital garage’, while Direct Line Insurance has a ‘digital floor’.
Meanwhile some of the world’s largest banks including UBS, JP Morgan and Barclays have joined an initiative to set up private block chains to allow digital financial transactions within a safe network and are increasingly involved in crypto-currencies. The candidates hesitating between a career in Fintech or traditional financial services therefore shouldn’t to lose any sleep over it: soon every bank will be a Fintech company.
Seeking a job in Fintech companies? Think again!
Positions requiring Innovation and technological expertise coupled with particular skill sets such as asset management or investment banking have bright days ahead.
Rapid automation in the banking sector could lead to massive job losses, but mostly in back office positions where technology will create more efficient operations and processes.
Established financial firms can offer better career opportunities than start-ups. Career in a fin-tech start-up despite its exciting appeal is will be highly competitive and people will have to keep in mind the risk of losing the job throughout their career progression.
Joining a Fintech company is therefore, not the key to a long-lasting career within the same company. The failure rate of start-ups is notoriously high. It’s a fact that just less than 1% of the startups in India survive a five year mark and in the financial technology sector, it is even worse. Bobby Bathia, The CEO of social trading platform Trakinvest, stated that the failure rate of fintech start-ups is twice as high as that of normal start-ups. Meanwhile, M&A activity is also rife in the sector. According to a report into M&A activity in the first half of 2015 published by independent investment bank Berkery Noyes there were 192 Fintech mergers and acquisitions worth US$18.9 billion so far this year. Many banks themselves buy Fintech companies. Thus, most of these upcoming start-ups will be going through mergers and acquisitions with bigger financial institutions.
Incumbent financial institutions still enjoy the upper hand in terms of economies of scale and it is still time for these institutions to reach a tipping point of digital disruption. However, given the growth in fintech investment, this isn’t likely to continue for long.