Can traditional lenders make it to the final digital frontier — or will niche fintech firms crack open their world, asks Niall Brady.
Raisin.com should be a prime example of why Irish banks have everything to lose as borders between finance and technology begin to blur. The Berlin-based broker has built an online platform that allows banks from all over Europe to pitch to savers desperate for a better return on their money. Customers can earn 0.5% interest, for example, by using Raisin.com to make a three-month deposit at Greensill Bank in Bremen.
If they left the money at home, they might earn nothing, with Bank of Ireland cutting returns to 0% on branch-based demand deposits from next month. Deposits at Greensill are guaranteed up to €100,000 per customer, the same protection available from Irish banks.
The only catch is that Raisin.com cannot operate here. Within weeks of opening last year, the Central Bank of Ireland shut it down. According to Raisin.com, it was told it cannot gather deposits from Ireland without a local licence, even though this is not required anywhere else in Europe.
“Customers from all EU member states — except for Ireland — are eligible to become customers of Raisin and benefit from our attractive deposit products,” the company said. The Central Bank said it could not comment.
Regulation is not the only obstacle to the march of technology. Customers are resisting too, at least those who feel left behind by the push towards greater automation. Bank of Ireland was forced to rethink plans to limit over-the-counter cash transactions in its branches in 2015, for example, following fierce opposition from farmers, country people, the elderly and some of the bank’s own staff.
These episodes are mere hiccups, however, in a process of digital disruption that will inevitably transform the way we think about banking. Once unassailable because their regulatory licences provided an impregnable barrier to entry by outsiders, banks are looking a lot more vulnerable.
Fintech has deconstructed banking into its constituent parts — savings, loans and payments — allowing outsiders to come in and cherry-pick the most valuable bits. Microsoft founder Bill Gates summed it up when he said that while we still need banking, we no longer need banks.
“Customers used to talk about my bank; now it’s the bank,” said John Murphy, fintech leader at PwC in Dublin. “Banks need to rebuild their customer relationships but they’ve a lot of work to do.”
Facebook made a clear statement of intent last October when it was licensed as a payments provider by the Central Bank, giving it a passport to provide e-money services throughout Europe. While its strategy remains unclear, some believe the social media giant could eventually push traditional banks to the sidelines, relegated to the role of contractors providing financial services to Facebook’s 2bn worldwide users.
Other tech players have chosen to collaborate with banks — at least for now. Google is working with Allied Irish Banks and KBC Bank, where its Android Pay app allows customers to swipe phones rather than a bank card for in-store payments.
Initial predictions that fintech would annihilate traditional banks, however, have given way to a more sober realisation that the future is likely to lie in coexistence, even if not always of the peaceful variety. As Raisin.com and other fintech start-ups have learnt the hard way, technology on its own is no match for the growing tangle of regulations that bind financial services.
“Banks have as good a chance of adapting to technology as fintechs have of adapting to regulation,” Murphy believes.
Technology is a costly investment, however, especially for banks that are being squeezed by falling interest margins and the rising cost of regulation. Cloud computing, artificial intelligence, voice recognition and secure video conferencing offer the potential to remove a large chunk from their cost bases, while offering the potential to grow revenues by building stronger relationships with customers.
To make money, though, banks will have to be prepared to spend it first.
Last October, Bank of Ireland committed itself to investing a reported €500m on a complete upgrade of its core banking platform to be undertaken by Temenos, a Swiss software supplier. Some estimates put the bill closer to twice this amount, a massive investment for a bank currently valued at about €8bn. As well as driving down costs, the plan is to allow Bank of Ireland to master techniques developed by Facebook and Google, exploiting customer data to win their loyalty by personalising their banking. Further details are expected this week, when Bank of Ireland reports its results for 2016.
“In our view this is a critical component to delivery of sustainable cost-income ratio and thus improving return on equity,” stockbroker Davy said in a report.
The emphasis on cost reduction has obvious implications for employment. “Nobody has said anything about the impact for jobs or branches — yet,” said Larry Broderick, general secretary of the Financial Services Union. “I expect to be in talks with Bank of Ireland in the not too distant future about job numbers, the quality of those jobs and the future direction of the group.”
Peter Oakes,a fintech expert and former director of enforcement at the Central Bank, questioned if Irish banks are big enough to justify the scale of investment that will be required. “Do they have the financial resources for a wholesale sweep of their legacy IT systems? Even if they do, is this the best use of taxpayers’ money for the banks still under state control?”
Foreign-owned banks may be in a stronger position because they can share the cost with their parent groups. “Our key differentiator is that our owner, RBS, has the scale to invest in innovation and we’re able to plug into that,” said Ciarán Coyle, chief administrative officer at Ulster Bank. “Dublin has become a scouting point for the rest of the group because of the strength of the fintech community here.”
Having committed €100m to installing the same Temenos platform as Bank of Ireland, KBC is pioneering technologies that will be rolled out at sister banks in Belgium and elsewhere in Europe if they prove successful in Ireland. “We’re a test-bed for the group,” said Eddie Dillon, director of innovation at KBC. “To be a real challenger bank, we’ve got to do things differently.”
Ireland’s small size might give the banks some breathing space, especially indigenous lenders that will have to fund investment in technology themselves. “The scale of investment required is a huge roll of the dice for AIB and Bank of Ireland, so they may let others have first-mover advantage and learn from their experiences,” said Murphy. “Ireland is a relatively small market, with limited interest from foreign players, allowing the banks a certain degree of latitude.”
The longer they delay, however, the greater the risk that fintechs will nibble away at the most profitable parts of their businesses. Crowdfunders such as LinkedFinance and GridFinance have loosened banks’ grip on the market for lending to smaller businesses. Currency specialists such as CurrencyFair and TransferMate, where Oakes is a director, are eating into banks’ high margins on foreign exchange.
The market for personal lending came under attack last week when Chill.ie, an online insurance broker, joined forces with AvantCard, a credit card provider. Former Anglo Irish bank executive Tom Brown has teamed up with a senior Google executive to launch Profunder, which offers commercial loans over the internet.
“The days of banks solving all problems within the confines of the organisation are over,” Coyle acknowledged. “Fintechs are doing a very good job at focusing on very narrow segments. From a slow start, the trend can only go one way.”
One of the biggest threats is the ability of fintechs to inveigle themselves between banks and their customers.
Fire.com, for example, has developed a payment account that provides customers with real-time information, so that they know at all times exactly how much is in their accounts. Banks, in contrast, are stuck in the past, displaying out-of-date balances. Almost 900 businesses in Britain and Ireland have signed up for Fire so far.
By partnering with a payroll software provider, it could integrate payroll calculations with the payment of salaries into employees’ bank accounts, edging the employer’s bank out of the process.
“My sense is that banks aren’t going to disappear,” said Colm Lyon, who bought Fire.com after selling Realex Payments for €115m in 2015. “Banking services will be accessed in a very different way, however, maybe through third-party providers.
“Banks will have to decide at which layer they want to play. Do they want to remain a gateway to financial services or do they want to be deposit and lending institutions?”
Lyon would prefer to partner with a greenfield operation rather than attempt to plug his real-time account into the existing systems of an established bank. “Our focus would be on non-financial businesses,” he said. “Banks are stuck with their legacy systems.” The EU is to give fintech a stronger hand through a new piece of legislation; the second payment services directive (PSD2). The aim is to foster competition by forcing banks to allow third parties such as Facebook or Google, to access the data of customers who authorise it.
“The decision about whether to partner with fintech has in some ways been made for banks by regulation,” Coyle said. “PSD2 will encourage them to open up and share data with third parties.”
Back in Berlin, Raisin.com is looking at other ways to tap Irish savers that do not involve the expense of being separately regulated here.
“We continue to work on a concept that will allow Raisin to accept customers residing in Ireland again soon,” it said. “We will inform the Irish audience as soon as this is the case.”