Opinion: Big banks will fall because they keep hiring people

Photo credit: Andrew Gook.

Let me start by saying incumbent financial services have been using the word fintech for a very, very long time. From before you were born, in fact. All of this fintech hype would lead you to believe that banks are building products with sticks and stones and that startups have invented financial technology. Financial products are already digital. When you transfer money, place a trade, or sign up for an insurance policy, there is no factory behind the scenes producing anything. Banks have historically had high profit margins because their direct “cost of goods sold” was virtually zero.

The banks’ long-term problem is not the products, it’s the people. The high profit margins led to a decades-long investment in people and places to “service” the customers using these products. So much so that the personal touch became one with the products themselves. This, in turn, led to high fees to compensate for the cost. It’s precisely these fees that are under attack by software.

The banks’ long-term problem is not the products, it’s the people.

Amazon decimated traditional retail not because of a product advantage (they sell the same products as a shop) but because it attacked the expense of traditional retail. People valued price and convenience above all else, so Amazon is winning. Complacent banks will suffer the same fate. Why? Because products and personal services are no longer what people value. High touch is dead. As such, the branch will eventually disappear en masse.

The easiest argument against the Amazon effect on traditional financial services is that people will always value human advice. I believe this is largely untrue and generational. When I was at E*trade over 15 years ago, I heard the same arguments: Online investing is a niche because people will always value a stockbroker for advice. Really? In 2017, I do not know a single stock broker and, I would guess, neither do you. That online “niche” now represents 80 percent of the market.

If you want to know what the future holds for traditional financial services, just look at China. Over 500 million customers use their mobile device for financial transactions and it is just the beginning. Apps such as WeChat with its artificial intelligence will be the bank of the future. There will be more bots employed than financial advisors because they work 24/7 (not 9:30 pm to 5 pm), they can find real-time insight from data that is not humanly possible, they are rational, they can be programmed without conflict of interest, and they treat a US$1 account the same as a US$1 million account. It goes without saying that a bot requires no salary, no bonus, no vacation, and no corporate credit card.

If your online bank worked as well as your food delivery app, would you go to a branch? If regulations would accept a digital fingerprint instead of a wet signature on paper, wouldn’t you do it?  Regulations will ultimately evolve with new business models and new business models will chase profit. Nothing I have said is profound, but my point is that the change will be more dramatic and happen faster than most people believe. I used to go to shopping malls and movies not that long ago.