Study: Banking must change to stay relevant

Innovation in lending is happening outside the traditional banking industry, a discussion on research from financial services firm PricewaterhouseCooper highlighted last week.

Faced with growing competition from alternative lenders in particular, traditional banks might have a hard time keeping up unless there is a change in mindset within the industry, panelists said.

A research paper called The Future Shape of Banking: Time for Reformation of Banking and Banks? asserts that core banking services such as lending can be delivered outside of the regulated banking industry. Hence incumbent banks cannot afford to be complacent.

The research questions how banks can secure the ongoing support of policy makers in the wake of regulatory measures which have hobbled them post-financial crisis. Other factors including technology and demographics are also driving change. Banks will have to fight to stay relevant, Kennedy said at the panel. He pointed to customer focus as being key to this. The research calls on banks to rediscover their purpose, imagination and ambition, he said.

“[Banks] still have strong brands, operating capability and know-how. They are still deeply embedded in the fabric of how the economy works. By and large, they believe in the importance of reconnecting with their customers, and they still have the opportunity to act on that belief. But act on it they must,” Miles Kennedy, a financial services partner at PwC, said in a statement.

However, Robin Bowie, founder of alternative investment bank Dexion Capital, said that all the innovation was happening outside of traditional banking. “Where we go from here is obvious. Innovation is taking place, those with the best systems will emerge as the winners who will consolidate and then monopolise. Every industry has this cycle,” he said in a statement.

Kennedy commented that banks face a few paths including whether to become low-cost utilities, with a no-frills approach to banking, or whether to continue trying to cover all bases.

This chimes with a wider discussion that is happening within the walls of government and regulatory bodies, panelists said. Steve Clark, founder of alternative lender and hedge fund manager Omni Partners, argued that the utility banking model for the big high street banks would be very attractive for politicians who wouldn’t then have to worry about them being too big to fail.

Luke Lang, co-founder and chief marketing officer for Crowdfund, an online equity and debt platform, warned that there had been a lost decade for small and medium sized businesses as banks are “clearly not interested in SME lending.” 

Clark affirmed that all customers were looking for two things: flexibility and speed. He said that demand for alternative lending was so great that customers are willing to pay a premium “in return for good customer service and the certainty of receiving a business loan.” 

The research also shows that as the industry landscape changes, so too will regulation as it will need to deal with different risks.