Remember the financial crisis in 2008? While major financial institutions around the world trembled and some fell, Canada’s banks were unshaken and unmoved. The shares of our big banks are the bluest of blue chips, offering capital preservation, dividends and growth, classic widows-and-orphans stocks and the backbone of institutional funds like pensions.
It’s not just good management that has enabled the big banks to do so well. They have also benefited from their dominant position in the financial field. Sure, credit unions and others nibbled away at their customer base, but the vast majority of Canadians use the big banks to hold their money, lend them money and provide other financial services.
Now, this dominant position is threatened.
Ask your parents or grandparents about when there was only one phone company in any geographical area. Dissatisfied customers had no alternative. Now, there is competition in telecommunications.
The banking system is about to undergo similar changes and for the same reason – technology. Technology has been changing our banks for decades. It even has a name – fintech – but it has largely focused on the back end of the banking system with word and number processing replacing thousands of clerks. Then came more ATMs and ever expanding online and even smart phone banking. These increased the efficiency and profitability of the banks and did not threaten their dominant position.
Fintech has now moved beyond finding more efficient ways to do the same old, same old. It can enable lenders, borrowers, investors and businesses to accomplish financial transactions without the intervention of a bank. Think crowd funding.
The biggest change is not what fintech is doing, but who is doing it and for whom. New applications of financial technology are being delivered by some 12,000 new fintech startups, not big institutions. The market for financial technology used to be limited to financial institutions, which are relatively few in number. Now all individuals and businesses are potential users of fintech and the entrepreneurs are out there to serve them.
McKinsey and Co., a consulting firm, estimates that banks could lose 60 per cent of their retail banking profits. Business banking, especially for smaller businesses, is also at risk. Are banks concerned? Yes. Already the Canadian Imperial Bank of Commerce and Bank of Nova Scotia have suspended access to their electronic funds transfer services to Lending Loop, a peer-to-peer lender. The matter is under dispute.
Will fintech be to banks what Uber is becoming to taxis? Most likely not. Financial transactions loom larger than cab rides in our lives. Finance is bound by rules, regulations and constraints, which we need if we want our monetary transactions to be secure. This ensures a role for big banks.
Like other new small businesses, most of the 12,000 fintech startups will not survive, though some will do very well indeed. Some of the better ones will be bought out by the banks.
Does this mean that banks can relax? Definitely not. They will be losing customers and profits to the new fintechs. They will have to become limber and more competitive to minimize this loss. As staid, established institutions, they will have trouble attracting and keeping the cutting edge talent to do in house what the start-ups are doing. The best and brightest tech workers are drawn to startups with the chance of really hitting it big.
Like the phone companies, big banks will survive if they can adjust to a world where their traditional dominant position cannot be taken for granted and their competition will be much more than another bank very like themselves; a world where technological change is accelerating and management must ever be on their toes.
Our best banks will be able to do it. Those widows and orphans, meanwhile, will have to pay more attention when choosing bank stocks for their portfolios.
Troy Media columnist Roslyn Kunin is a consulting economist and speaker.