I suspect that the big banks will continue to dominate the consumer and small business space. The big advantage they have is that people are reassured by existing brands so will continue to bank with them. Big banks are sitting on natural advantages: ubiquity; brand reassurance; and the ability to gather information on the customer, which gives better insight into credit worthiness and liabilities.
But they are struggling with the fact that they have legacy systems that bog them down with cost, which makes them less effective. My guess is that in 15 years, in the small business and consumer space, the market share of the big five will have fallen but they will still be dominant. If it’s 95pc today, it’ll be 85 but not 50pc; they will still be dominant.
Could they build new systems that give them the cost base of a new entrant? It’s possible. I do think that over time the role of physical branch, for example, will decline. But it’s difficult to put yourself in the mindset of people with a different attitude. I haven’t visited a bank branch for 30 years. That’s when I became a First Direct customer, which was telephone banking then and I’ve been with them ever since. I don’t understand why people want to visit branches.
OakNorth illustrates that if you keep your business model very simple, you can have a stunningly low income/cost ratio; you can build systems that turn the business of banking into a computer.
OakNorth raises term deposits from individuals over the internet, and it runs its banking systems in the cloud. When you use state-of-the-art technology, you can get costs incredibly low.
My gut feel is that there will be more and more OakNorths picking off a particular bit of the product proposition - like term deposits - but many people will want to have their current account in one place – an assured big banker.
I’m not sure tech giants like Google and Amazon would move into banking. Obviously they could. For decades, we’ve seen new companies coming into banking with a customer franchise, but if you look at Tesco Bank and Virgin Money, they are still quite peripheral in terms of scale. Is there something about tech companies that will achieve more than the others? We are clearly in an environment where a lot of banking is about technology. It’s a pure tech game - just computers talking to each other. So why not? On the other hand, there’s a skillset around managing liquidities and capital characteristics and there are skill sets on the lending side of the equation that may be important and have been accumulated in the banks over time.
"My gut feel is that there will be more and more OakNorths picking off a particular bit of the product proposition - like term deposits - but many people will want to have their current account in one place – an assured big banker."
It’s an interesting question. Across the world, where do we see high tech companies getting into a significant role in quasi-banking? Only where there’s a regulatory arbitrage opportunity. In China, many people hold their deposits through Alipay, but this is because the Chinese authorities allowed a regulatory arbitrage to develop.
Alipay was a non-bank, so could offer to pay a higher amount for your deposit than an ordinary bank. It just holds money then lends it to a bank, which is what happened with the original Merrill Lynch Cash Management account, which was a pioneer in this kind of thing. That was a result of Regulation Q in the US, which limited the amount of interest US banks could pay out on capital deposits, so people went over to the money market funds. The whole structure of the US money market developed from there - but not in the UK because our banks weren’t constrained by Regulation Q. So a lot depends on the regulation…
I think crypto is much less important than people think. You have to distinguish blockchain technologies, which are useful for achieving assurance about who counterparties are and how they transact in a way that is safe and double-checks the integrity of your counterparty. This technology is likely to significantly reduce transaction costs in payments and trading. However, one mustn’t overstate how important that is in the bank payments space.
For most individuals, their payments are provided for free as a by-product of the bank account. If you are an SME sending £1,000 to a supplier in France, you get charged £25 for the payment, which is not insignificant. But new players now move that money for £1 instead of £25, removing that charge without blockchain. And now HSBC is saying it won’t charge anything for international transfers. People like to talk about how they are getting ripped off of transfers but when you run the figures they are not huge.
Blockchain may further reduce the cost of payments and may become a hygiene factor but it is not transformational in terms of the economy.
When I look at bitcoin, it is two things - neither of which the world needs. It’s an arbitrary store of value. Its price is what people think it is at that time but it has no economic function.
Separately, bitcoin allows the anonymity of a store of value within the digital space. You don’t see who owns the coin. That’s fine but what is the social impact of having that? The only people who want an anonymous store of digital value are criminals, tax avoiders, terrorists and criminals. I’m perfectly happy to have a traceable store of value because I pay my taxes and I’m not a terrorist. These crypto currencies aren’t adding anything to society. They are interesting as a technology but that doesn’t make them useful. I’m very sceptical. I don’t think it will transform our economy.