Juha Saarinen: Startups set to leave banks in digital dust

Banks' creaky IT systems are a brake on the gains of going digital. Photo / 123RF

Banking and IT should be a totally natural match for each other: instead of slow and costly manually processed transactions and service provision at branch offices that are expensive to build and maintain, computers can do almost all the work much faster and cheaper.

To some degree, that holds true for bank customers.

Your computer accessing internet banking means branch visits are a thing of the past, and cash and cheques? Who uses that in 2017?

In theory, everyone should be happy about that, except for laid-off bank staffers of course.

Banks can shave the cost of providing routine services to a bare minimum, and customers can enjoy lower fees and better service.

Except it hasn't quite panned out like that, as anyone who has totted up bank charges over a year, or waited days for payments to go through even though the money's instantly disappeared from their account, will note. That's before we get into arbitrary penalty fees.

There are several reasons for this, including old IT systems at banks that don't talk to each other to that two-edged sword, the necessary financial services regulation, putting the brakes on competition.

Banking's about to feel the squeeze though, and IT could undermine rather than help the money lenders. Management consultants McKinsey are the latest to join a growing choir pointing to digitalisation (that is, IT and the internet) that is about to eat banking's lunch.

McKinsey thinks that by 2020, profits from banks' fees and margins-based businesses will take a huge hit, in some cases shrinking by a quarter or more.

Why would it not? Amazon, Apple and the like have spoilt people with convenience, low charges and great service; banks haven't followed suit, and created a lucrative market for the dreaded disruptors with regulators becoming more keen on the competition they provide.

And, there can be plenty of incentive for customers, individuals and businesses alike to switch to a non-banking player.

For example, a non-banking startup could offer New Zealand companies payments for an expensive $45 per transaction and still seem like a bargain compared to the usual $90 to $120 banks want.

Speed is totally required for today's internet businesses and the users they provide service to, and nobody wants to wait.

If said processors can handle the transaction the same day or overnight instead of having to wait for days or a week, switching away from banks would be a non-brainer.

Speed is totally required for today's internet businesses and the users they provide service to, and nobody wants to wait. It's just not how the internet economy works.

Some banks have woken up to this and started opening themselves up to the world by providing information and services via application programming interfaces (APIs) that developers can use when they code apps. That's a start.

It's late in the day though, and banks have legacy IT systems that aren't set up for the internet and will be costly to replace, not to mention the regulatory burden to deal with.

Worse, banks have baggage: they're a necessary evil that most people would drop in an instant if a cooler entity without a history of fleecing people comes along.

Or, it doesn't have to be something cool: it could be Facebook deciding to knock the banks for six by offering financial services for its almost two billion users.

That's perhaps a lesser of two evils scenario, but you can bank on the social network (and Amazon) thinking about it and the next few years will be interesting to watch.