If you are interested in commercial banking and the commercial banking industry you really should read the newly released study by Citigroup (NYSE:C) titled "Digital Disruption: How FinTech is Forcing Banking to a Tipping Point."
One of the basic conclusions of this report is "Up to 30 percent of the current employees in the banking industry may lose their jobs to new technologies in the next 10 years…."
Nathaniel Popper reports in The New York Times "the number of employees at American banks would drop to 1.8 million people in the year 2025, down from 2.6 million last year and 2.9 million before the financial crisis. An even sharper drop, of 37 percent, is predicted for European banks."
Without going into specifics, many of which aren't known at this time, this says a lot!
The two key areas of impact?
Lending: "accounting for 46 per cent of the $19bn in private funding that flowed into FinTech during the past six years," is going to be major, writes Laura Noonan in the Financial Times.
The other major area to be affected is the payments area: "accounting for 23 per cent of the investment in FinTech."
As far as banks are concerned: "the banks Citi analyses make 56 per cent of their profits from granting loans (compared with just 7 per cent for payments)."
It is not altogether clear that the last number mentioned captures all of the impact of the payments function because of the interaction of the payments facility of the bank and its branching system.
This result is not surprising to me since it has been coming for a long time.
When Paul Volcker, former Chairman of the Board of Governors of the Federal Reserve System, commented on the most important innovation in banking during his professional career, he stated that the ATM system was the most important.
ATMs were introduced into the banking system in the late 1960s. The innovation was declared to signal the death-knell of the banking system. But, it took quite a few years to really catch on. The problem was that it was a "generational thing." That is, the ATM was not immediately accepted by the "older" generation and the real usage of the system only came about as more and more younger people began to use the machines.
The introduction of modern information technology into the banking structure has taken a lot longer than many people expected it to take.
Yes, there is the generational thing, but also there is the regulatory thing. Bank regulators have not been that accepting of the changes needed to change the lending system and the payments system in this country.
It is amazing to see some other areas of the world, many in emerging nations, have moved ahead of the US banking system in bringing information technology into general practice. One always assumed that this would be transferred back into the United States. And, it is.
But, going back to the generational thing. For at least five years, in my writing, my teaching and my speeches, I have argued that bankers needed to look at one area to see where banking was going to have to go in the future. This area was that of teenagers.
My first question to bankers was, "What do you see the young people doing today?"
I saw teenagers… even younger kids… spending a great deal of their time playing computer games, texting friends and other things using the new electronic technology.
My next question was "How are you going to be able to serve these people when they are five years older?"
This is the banking system you are going to have to create in order to meet the demands of the emerging customer base.
These individuals don't really know about going into branches. They don't understand why business needs to be conducted using paper. They don't see why they have to see a "person" to get their business done.
Furthermore, from the standpoint of banking, many of the transactions the banker does are routine, repeatable, small-scale transactions that can be done very effectively using data bases and analysis systems. Many loans don't really need a person to analyze the loan application. Most transfers are just straight-forward transactions that just need an entry point.
And, technology, once it gets up and running within a user-space, generally takes off. That is, the learning curve seems to be exponential.
In terms of investing in commercial banks, it is imperative that you invest in organizations that have the leadership to bring the bank into a leading position in this emerging area. Also, you need to invest in organizations that can achieve the scale necessary to achieve the network effects and economies that are needed to compete in this area.
The subtitle of the Citigroup report states that FinTech is forcing banking to the tipping point.
My remaining comment is…It's about time!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.