Finance, Startup Opinion

Viva la neobank: Big banks might be ignoring the meteor, but extinction is inevitable

Eric Wilson /

Xinja

Xinja founder and chief Eric Wilson. Source: Supplied.

“Radiometric dating … of the asteroid impact that killed the dinosaurs … suggests that mass extinction only took about 32,000 years.”

Who would have thought the Smithsonian magazine would allow me to both nerd out and provide a perfect metaphor for the future of banking? It takes a certain kind of Zen to think the phrase “only took about 32,000 years” makes any sense. I get frustrated waiting 15 seconds at the crosswalk.

It does feel like change in banking may take 32,000 years to go anywhere, but just like that asteroid hurtling through the dark expanses of space unseen but inevitable, the existing legacy banks have already had their own extinction event.

Unlike a big rock landing on your head, the legacy bank extinction event happened with a lot less fire and brimstone. More of a quiet rustle of parliamentary papers half a world away, from which the end of an era will come.

The end of Australian legacy banks started in London where new legislation started the neobank age, allowing the first serious banking regulator in the world to begin accepting new challenger neobanks. This has been amplified by a secondary impact in China with the explosion in payments tech.

Fast, customer-focused technology, delivered at a fraction of the build cost, coupled with amazing products and services at a cheaper rate — that’s the promise of the new evolution of life in the banking industry. Us neobanks are just starting to crawl out of the primordial soup of life. We are small, weak and vulnerable. Some of us will get stepped on by the big dinosaurs, some of us will get eaten as we grow, but grow we will. Evolution is unstoppable.

How does a traditional legacy bank, with its huge cost base of branch networks, people, compliance costs, information security issues and legacy IT possibly offer a competitive product and stay alive when faced with the fast-moving, nimble neobank predator, with low costs, cutting-edge technology and customers at the heart of everything they do?

Right now? Easily.

They use their economies of scale, their giant deposit bases and their oligopolistic powers to block, starve or kill their smaller foes.

But the asteroid has struck, ash is filling the skies and the extinction has started.

Already many parts of the banking model are being stripped away by competitors that didn’t exist 15 years ago — FX and remittances, home loans, personal lending, savings, and now the final holy grail, deposits.

Neobanks already provide overseas customers with a better alternative. Australians will soon have access to independent neobanks offering a full range of customer-driven services.

As the extinction event continues, the economies of scale enjoyed by the big banks will slowly be whittled away. This will create an ever-increasing death spiral as they try to cut costs to compete, causing even worse customer service, generating less profit, which, of course, will result in more cost-cutting to compete. The extinction may take 32,000 years, but happen it will.

So what does new life in this brave new banking world look like?

It’s not necessarily small (think WeBank) but it is fast and nimble. It is able to understand and adapt to its environment rapidly. It never stops evolving, releasing new features, updates and customer delighters on an ongoing basis.

It is also very, very smart.

It makes data-driven decisions, constantly seeking data on its customers, testing its ideas, proving or eliminating the things that work or don’t. It is an incessantly evolving organism, with a data-driven brain that learns constantly.

I would also like to think neobanks will have more heart and soul than our forebears.

Perhaps the neobanks will look at how their ancestors fed off their customers, and decide to be vegetarian. To honour their customers with great service, good ethics and personal attention, and in return be rewarded by payment, trust and referrals. A symbiotic relationship, rather than hunter and prey.

Like any extinction event, there are great threats and great opportunities. For consumers, there is the chance of a great new deal, a banking relationship that is mutually beneficial and the chance to have their needs heard and met.

For the traditional banking industry, it could be a long and painful transition. Large numbers of redundancies and under-employed staff, reduced dividends and unhappy shareholders. The only way to try and mitigate this impact is to face it. To get on the front foot and use the might of these giant banks to innovate, evolve and transform.

Instead, much of the banking industry is looking anywhere but up, trying desperately to ignore the ever-growing fireball in the sky behind them.

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Eric Wilson

Eric is the founder and chief executive officer at Xinja.

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