It takes chutzpah to stand by Canadian banks in this crazy market. Fintech threats are spinning their disruption story so brilliantly that long-time supporters need nerves of steel to stick with the beloved Big Six.
Inspired by Silicon Valley stars such as Uber Technologies Inc., which is dismantling the stodgy taxi business around the world, everyone from Apple Inc. to privately backed startups are turning their attention to banking.
Financial services serve up some of the fattest profit margins of almost any industry, and that has put the crosshairs on everything from wealth management to payments to personal and small business lending.
The onslaught has created a new narrative for Canadian banks – one characterized by upheaval. Worried they are not nimble enough to compete, and that they are not investing in the right businesses, the country's largest lenders keep restructuring, with charges expected to top $1-billion this year.
No matter how much they adapt, it never seems to be enough. The doomsday scenario, backed by big names, keeps grabbing headlines. In October, McKinsey & Co. went so far as to say that up to 60 per cent of banks' retail profits might evaporate over the next decade.
Enough with this madness. The fintech threat is certainly no joke, but banks are not pushovers, either. And Canadian lenders, which are for the most part well-diversified and dominant in their home market, will be especially tough to unseat. The goodwill they have here is almost unfathomably high.
By now, so many sectors have been disrupted – including the media, one of the first industries to be turned upside down – that no one can be blamed for being fearful for financial services. The expectation is that customer loyalty breaks down when doing business on a digital screen; whichever company offers the most beautifully designed and efficient service is expected to win. (The buzzword in Silicon Valley is to "delight" the client.) Apple did this with iTunes; Uber did it with cabs.
What few are factoring in is that the banks are not taking this threat lying down. Some were slower than others to appreciate the threat's enormity, but now they are ready for war.
No one should discount the power of preparation. If cab companies had built a nifty mobile app when the Uber threat emerged, and had they started accepting things such as plastic when the all the other retailers did, they would not be teetering toward extinction.
Banks also have the funds to fight a protracted battle. Because they operate so many different business lines, from mortgage lending to capital markets to asset management, they have deep pockets to invest in emerging technologies – or to buy any upstart that poses too big a threat.
This is not to sugarcoat the issue. Beating startups will require a lot of money. And it could certainly hamper profits, as McKinsey warned.
But remember that Canadian banks have been tested before. ING Direct and its no-fee chequing accounts launched here in 1997, amassing 1.8 million customers. The domestic banks were caught flat-footed. Sixteen years later, they ended the threat when Bank of Nova Scotia acquired it – although that took $3.1-billion.
And it does not always have to be the banks versus everybody. Financial institutions have long partnered with other companies, such as Davis + Henderson for physical cheque processing and NCR for ATMs.
Disruption can appear to happen so quickly it seems as though companies are blindsided. That is misleading. Disruption is often very slow at first, and then accelerates once the upstart becomes better known. Because the banks – both in Canada and abroad – are so attuned to the threat, they have the chance to follow quickly.
Do not be over-intimidated by the upstarts' target clientele, either. Millennials are often made out to be some special breed that plays by new rules. I am one of them, and I can promise that is not always true.
Technology's evolution over the past five years has been rapid, and my friends and I have changed our habits many times because of it. We once kept in contact through individual BBM convos; now we talk all day in Whatsapp group chats.
Throughout all this change, one of the few constants has been who we bank with.
There is a deep-rooted reason for that. As much as Canadians love to hate their banks, they also secretly love them. The reasons vary: because our lenders made it through the financial crisis unscathed, because they have been part of our lives since we were young. Whatever the cause, the resulting trust is very, very deep. And try as they might, the upstarts cannot replicate it.