I had an interesting discussion about change in the banking markets again the other day.  We were citing emerging new players like Square, Stripe, Klarna and Lending Club, as well as players that have already emerged like PayPal and Apple Pay.  In all of these cases, my colleague felt that these players have all added something to the banking system, and noted that they have not destroyed or replaced anything.  True, to an extent, but when PayPal is processing $70 billion a quarter, and launching new capabilities like Venmo that process near $2 billion a quarter, banks must surely be missing a trick?

Maybe or maybe not.  After all, nearly all the P2P lending in the US and UK is to under-served markets or, in other words, markets that banks don’t care about like higher risk small businesses and less credit worthy citizens.  The payments processing structures that have emerged are to make it easier to serve online and on mobile, but internet sales are just under 6% of total retail sales, and this is something that many fail to realise.

In other words, banks have a large incumbent position.  They have millions of consumers who are too lackadaisical to switch; they have thousands of business customers who find it too difficult to switch; and they have millions of merchant terminals transacting real, physical retail sales, that will take decades to displace.

This is the strength of the incumbents’ position.  A large market that has taken years to create and is held in position by so many players involved: consumers, merchants, businesses, governments and more are all wrapped into the banking system that exists today.  So the big question has to be: when should a bank move?  When is the market creating something that banks do have to respond to?  Where is the tipping point?

I’m sure you all know that the tipping point is when a change in the markets is so fundamental that, if the incumbent does not respond, they will be replaced.  Where is the tipping point in banking?  Is there one?

When we look at Fintech and all of the new players, has a single one created anything that banks seriously need to worry about?  Is there anything out there that will fundamentally change the incumbents’ business model?

I would love to say yes, but I struggle to take this position as every start-up is doing something that adds to the system, rather than replaces it and even if they replace it, it’s early days.  Even Klarna would affirm that they are attacking the four-pillar card model, but they’re not replacing banks.  Although Zopa claim they are replacing banks for credit, their market share is still low – just 2% of all consumer credit – so there’s a long way to go before they replace something.  Meanwhile, their 
American versions are just becoming outsourced credit risk managers which, long-term, might be the same position as Zopa.  And that’s the question: when do these firms become serious competitors?