When you think of threats to FTSE 100 banks Lloyds, Barclays, and HSBC, what comes to mind? Brexit? A property market collapse? A global recession? PPI claims?
All of these threats are valid, of course. They could all potentially impact profitability at the banks. However, I think there’s another dominant threat that’s lurking and I’m concerned that it has the potential to have devastating consequences for the FTSE 100 banks over the next decade. I’m referring to the rapid growth of FinTech (financial technology), and the rise of digital banks such as Monzo and Revolut, which are changing the way banking works.
Traditional banks: asleep at the wheel?
What concerns me about the new digital banks and FinTech companies is that many offer innovative services that the traditional banks don’t. Or, they’re offering traditional banking services at a fraction of the price that high street banks charge for the same service.
Take digital bank Monzo, for example, which now has around 1.5m customers. Not only does Monzo offer a state-of-the-art banking app that enables customers to track their spending habits in real time, but it also offers many benefits for those who travel regularly, or transfer money internationally. For instance, customers can send money abroad at a rate up to eight times cheaper than high street banks through TransferWise (more on this below) and the bank also doesn’t charge any fees for international spending.
Then, there’s Revolut, another digital bank that’s growing at a formidable rate and already has over 3m customers. Revolut allows customers to spend money in over 150 currencies at the interbank exchange rate, meaning they could save a fortune when travelling abroad. The bank’s app also allows customers to save their spare change by rounding up every transaction and directing the pennies towards savings.
Does your bank offer you these services?
With such innovative features, I can these kinds of banks stealing more and more market share from the bigger banks in the years ahead if the traditional banks don’t innovate and improve their offerings. Younger consumers, who live their lives through their smartphones, will certainly be attracted to the start-of-the-art platforms and apps.
Moreover, it’s not just the digital banks that the FTSE 100 banks need to be cautious of – a number of FinTech companies are also completely overhauling the traditional banking model right now.
For example, TransferWise, which I mentioned earlier, has been a game-changer for international money transfers.
Let’s say I want to transfer £1,000 to a friend in the US and the official GBP/USD exchange rate is 1.29. If I walk into a high street bank, I’ll be stung with a huge FX spread, meaning the bank will take a large cut of my money. I might only receive a rate of 1.23, or less. Yet through the TransferWise website, I could send that money to the US at a rate of 1.29, minus only a small fee of around £4, resulting in a saving of around £56.
Again, the banks are asleep at the wheel here. They need to be more competitive, otherwise they could lose market share.
In summary, technology is having a big impact on the banking sector right now, and I think the banking industry is set for massive changes over the next decade. FTSE 100 banks need to innovate quickly, otherwise they’ll be left behind.
According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…
And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...
It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…
But you need to get in before the crowd catches onto this ‘sleeping giant’.
Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.