Fintech is revolutionizing the world of finance, and traditional banks worldwide are reacting — boosting mobile services and shuttering branches to trim costs — all in an effort to stay in the game.
Over the past decade, venture capitalists, private equity firms and a number of other big players have been pouring money into fintech start-ups. Since 2010, more than $50 billion has been invested globally in almost 2,500 companies as these innovators redefine the way we bank, according to Accenture. In the United States alone, revealed a Citibank report, investing increased from $1.8 billion in 2010 to $19 billion in 2015.
Although only about 1 percent of North American consumer banking revenue has so far migrated to these new digital business models, claims the report, that number is expected to increase to about 10 percent by 2020 and 17 percent by 2023 as consumer behavior continues to shift toward digital ways to save, spend and move money.
The United States and Western Europe need only look to China's banking industry to see that the impending disruption is real. There, companies such as Alipay and Tencent already claim to have more clients than the country's top banks. This is due largely to high Internet and mobile penetration, a large e-commerce system with internet companies focused on payments, unsophisticated incumbent banking and accommodating regulation.
"We're embracing digital interactions at a rapid rate for every aspect of banking, and this is resulting in a sustained decline in branch use that can only mean one thing: Banks that rely on branch interactions for revenue will soon go out of business," said Brett King, founder of mobile-based banking app Moven. The fee-free smartphone app, launched in 2014, combines a banking account, debit card, expense tracking and access to credit. Moven also has a network of more than 42,000 ATMs where you can withdraw cash without any fees. Since its founding in 2011, the company has acquired more than $24 million in investments.
Yet while Goldman Sachs analysts have predicted that banks stand to lose 100 percent of the student, consumer and mortgage loan business to marketplace lenders over the next five years, many of the megabanks aren't giving up without a fight. Instead, many are embracing digital technology, inking deals with fintech start-ups to create their own online presence.
Citibank, for one, formed Citi Fintech in November 2015, a division consisting of a number of employees from tech companies such as Amazon and PayPal. Its first mission: an upgraded app that uses voice and facial recognition to eliminate the need for passwords. Although Citibank won't disclose any of the details, a spokesperson there did confirm the app is on point to roll out before the end of the year, is partnering with a number of fintech start-ups and was testing its voice recognition feature using Amazon's "Alexa" program.
Their approach is to embrace the latest financial technology, not fight it. "We talk to fintech's all the time," said the Citibank spokesperson.
Banks are facing a "series of Uber moments," said former Barclays CEO Antony Jenkins. He argued that the pressure from new technology-based competitors "will compel banks to significantly automate their business" and "that the number of branches and people may decline by as much as 50 percent over the next years."
Accenture's study supports Jenkins' argument. It found that customers interact with their bank 17 times a month, yet 11 of those interactions take place online or via other digital channels. As a result, banks are closing their branches — with half expected to disappear by 2025, revealed the Citibank report.
And that's raising red flags about the impact on bank jobs. According to the most recent data from the Bureau of Labor Statistics, online banking and mobile applications will most likely replace many of the job duties that tellers traditionally performed, and the number of tellers is projected to decline 8 percent from 2014 to 2024.
The pace of staff reductions so far has been gradual (2 percent per year, or 11 percent to 13 percent from peak pre-crisis levels). Citi researchers believe there could be another 30 percent reduction in staff between 2015 and 2025.
"I describe it as the extinction phase," said Stephen Bird, Citigroup's CEO of global consumer banking, to Fortune.com in June. "What happens in an extinction phase is that you either rapidly adapt and new means of competition are created, or you go extinct."
Branches and associated staff costs make up about 65 percent of the total retail cost base of a larger bank, said Greg Baxter, Citibank's global head of digital strategy, adding that a lot of these costs can be removed through automation.
Yet even with all the numbers pointing to a swift exit from traditional banking, Baxter said he still believes the human touch is integral to operations, referring to the Accenture report, which reveals that 86 percent of consumers plan to use their current branch in the future, and when they go, they say they expect a one-on-one interaction with a human teller.
"The future of banking is about focusing on advisory and consultation rather than transactions," said Baxter. "We need to take cost out of the middle and back office of doing simple repetitive rules transactions and move those people into other roles."
Citibank plans to do this by retraining their employees through a range of educational classes to help them expand their skill sets to be more relevant as the bank expands the remits of its staple employees.
"There's a natural fear around some of the degree of change. … But it's critical to focus on how do we retrain, redeploy and reenergize them to do functions that systems and technology can't do," he said.
Since 2010, more than $50 billion has been invested globally in almost 2,500 fintech companies.
In the United States alone, fintech investing increased from $1.8 billion in 2010 to $19 billion in 2015.
In China, fintech companies such as Alipay and Tencent already claim to have more clients than the country's top banks.
As many as half of the retail bank branches in the United States may disappear by 2025,along with a 30 percent reduction in bank employees.
Sixty-seven percent of the 85 million millennials coming of age use mobile banking apps.
Yet Moven's King shared his skepticism with CNBC about the number of people these days who still hope for the one-on-one interaction with banks, at any level: "While some surveys indicate customers still would like the occasional human interaction in a branch, actual customer behavior is showing the opposite," he said.
And with 85 million millennials coming of age — 67 percent of which rely on mobile banking — there's no doubt the banks that don't have a mobile-first mind-set will be left behind.