Anyone who is at all interested in innovation and disruption in banking and financial services will have noticed that the world is seeing a Cambrian explosion of startups targeting this industry. It’s an exciting time for us at Anthemis Group, as we have been working to position ourselves for this wave of change for many years. “Skating to where the puck will be” as they say…
The explosive growth of new entrants in financial services – both of individual companies and the universe of such companies – is of course exciting for us, but does pose some challenges, most of which arise from resource constraints, notably time/bandwidth and capital. We are working hard to address and overcome these challenges as we grow our unique “meta-company” model, however it continues to puzzle me how much new capital continues to be ploughed into “industrial age” business models, particularly in banking. Two (unrelated) articles that surfaced in my news stream this weekend inspired me to ask the question out loud.
The first highlighted the huge investment that has so far been required to get Metro Bank in the UK up and running – over £100mn (!) The second talks about a couple different investor consortia vying to spend anywhere from £500mn-£1bn to buy a portfolio of branches from RBS (Project Rainbow.)
While I think that Metro Bank has a (much) better approach to traditional branch banking than most incumbents, and I can believe that it is plausible that the Rainbow branches could be better managed as a “clean”, independent entity, I fail to see how either of these strategies will lead to long-term, sustainable success and strong investment returns for their backers. Neither is natively adapted to transition to the business models that will emerge as Information Age leaders. Their economics are fundamentally flawed; being more efficient/better managed will give them an advantage over the incumbents, perhaps sufficient for some short term (2-5 year) wins. But in the longer term, they are just as exposed to disruptive new models as today’s incumbents (perhaps moreso given their lack of TBTF inertia.) (On the other hand, if they are able to take advantage of their challenger status, access to capital and more nimble management to partner with or acquire some of the new Banking 3.0 leaders, perhaps they can emerge as winners in the longer term…)
The economics of truly new entrants like Fidor Bank, Simple, Moven and dozens of others are not just marginally better, but in some cases an order of magnitude (or more) better. Clearly as new entrants they face many (often different) risks in gaining adoption and scaling. And while the success of any individual company amongst these “digitally native” new entrants is not assured, I would suggest that the big winners of 21st century banking will almost certainly be found amongst these types of businesses (and not from the ranks of traditional, branch-centric models.) As such I find it ironic that much more investment capital (seemingly an order of magnitude or more) is chasing these old models.
Having worked in capital markets and the investment world for a couple decades now, I actually do understand the dynamic at work – people (especially those working for large institutions) typically feel more comfortable investing in “more of the same”: better, faster, smarter versions, sure but… Of course it is easier to make linear projections of the past into the future. Investing in new models requires people to acknowledge discontinuities and exponentials, which is admittedly hard. The thing is, if you are in the middle of an epochal change in economic and societal frameworks (which I believe to be the case), this is the only rational choice.
For anyone thinking of investing in the future of banking, I’d invite them to compare the metrics (customers, assets, volumes, unit economics, etc.) of these digital newcomers with companies like Metro or Rainbow per dollar or pound of invested capital. Now think of what any of these companies could do with £100mn, let alone a £1bn… The puck may be in the corner for now, but I’d rather be in front of the net.
- Economist debate on Retail Banking (economist.com)
- The bank branch of the future? (themexicanpost.wordpress.com)
- UPDATE 1-Customer numbers leap at fledgeling UK lender Metro Bank (uk.reuters.com)
- Lloyds’ Co-op branch sale collapses (bbc.co.uk)