Article

Could Apple or Google smash the banks?

Tech giants don't need to compete head-to-head with traditional banks and payment networks — they can simply innovate around them.

July 11, 2014

by Andy Brown, product marketing manager
Alaric Systems Ltd.

A combination of new firms and disruptive technology is threatening to radically alter the traditional European retail banking model, according to a new report, which warns that tech giants such as Apple or Google pose a serious challenge to the way existing banks work.

Banks need to face up to a number of challenges, from the expansion of the securities market to a huge new breed of competitors appearing on the horizon, the study from Deloitte claims.

The report, "Banking disrupted: How technology is threatening the traditional European retail banking model," argues that the competitive advantages of European banks are facing a twin challenge from new players and technology.

"Banks' core competitive advantages over new entrants are being eroded by technology and regulation," said Zahir Bokhari, lead banking partner at Deloitte. "Emerging business models are using new technology to reinvent key elements of financial services and new players are undermining the traditional bank business model by cherry-picking more attractive parts of the business."

There are two key trends noted in the report relating to the emergence of new players in the high-tech payments sector.

The first is what Deloitte dubs the FinTech revolution, where we see new payment specialists like PayPal and Square harnessing new technology to "reinvent key elements of financial services." Another example of this kind of disruption is the rise of the peer-to-peer lenders or exchanges, which the report authors say can "bring borrowers and investors together in a highly cost-efficient manner."

Secondly, Deloitte warns about the so-called "tech titans" entering the fray.

"There is much talk about the threat posed to banks by other large players outside financial services, especially technology companies," the report says.

"But the real danger here is not that a Google or Apple will one day support a banking subsidiary with a huge balance sheet. It's that by innovating around it in support of their own core business, such a player could fundamentally undermine the traditional integrated bank business model."

Moreover, it's not that there is one single new entrant or model likely to take over the market. The worry for banks is a combination of new entrants and technology "will steadily erode their core competitive advantage, resulting in a much smaller banking sector."

Clearly there is a big challenge here for banks, but the answer could be in the problem. By adapting to this new environment quickly by harnessing technology, there is yet room for banks. For example, as we've seen with banks allowing third-party developers to produce their apps, it is more than possible for these old financial institutions to keep up with the pace of change in the sector.

Download the free Deloitte report.

"Could Apple or Google smash the banks?" first appeared on the Alaric blog, Industry News.

photo: ken teegarden/senior living