Later this month, you’ll start to notice people buying their coffee or newspaper with their iPhone. Apple Pay, the Californian technology giant’s contactless payment technology, will hit British high streets at some point in the next four weeks, helping to accelerate the slow death of cash, or so Apple hopes.
The service is slick. Hold your iPhone up to a retailer’s card terminal, and it will scan your thumbprint, access your card details and make a secure payment, without the need for cash or entering a PIN code.
Britain, thanks largely to the London Underground’s Oyster Card, is more comfortable with contactless payments than America, which is Apple Pay’s only market to date, as well as having one of the world’s highest iPhone sales rates, so when it launches, Apple Pay is bound to be a success.
When that happens, one can expect to see a string of pundits lining up to declare that Silicon Valley is treading on the banking world’s toes. Apple has shaken up telecoms and music; Amazon and eBay the high street; Uber transport; and Airbnb the hotel industry.
Banks are safe from tech's claws, for now (Getty)
Why then, is the banking sector, with its dreadful customer service ratings, scarred reputations, and general aura of unpopularity, still dominated by the same old names, then? Can’t some whizzkid in a bedroom in California undercut HSBC or JPMorgan, leading them to fade into obscurity along with Comet and the phone book?
Consumers would like to see it, apparently. A survey in America of millennials – those in their 20s and early 30s who are seen as the early adopters of new products and services –said last year that banking was more at risk of disruption than any other industry.
Almost three in four – 73pc – said they would be more excited about a financial services product from a major technology company than one from their bank. More than half think that all banks are pretty much the same, and would like to see a tech company offer something new.
In the UK, as in the US, there is a burgeoning financial technology, or “fintech”, sector. TransferWise, a company that cuts out the banks to match buyers and sellers of foreign currency over the internet and offer better rates to both, has been valued at $1bn (£640m), as has Funding Circle, which offers a similar service for business loans.
Fortunately for the banks, however, none of this amounts to much more than tinkering around the edges. Apple Pay takes only a tiny proportion of the interchange fees charged for processing payments – most of it still goes to the merchant’s bank – and if its success means more digital payments replacing cash, the banks will be happy enough.
Peer-to-peer lending represents more of a threat – analysts at Morgan Stanley reckon it could grow from 1pc of consumer and SME lending in America to 10pc by 2020 – but these are figures that hardly make banks obsolete.
What’s more, as soon as these new lenders start to gain any sort of scale, regulators start to become interested. Three years ago, payday lender Wonga (remember them?) was the darling of the UK’s fintech scene, considering a £1.5bn IPO and growing profits hand over fist. As soon as the Financial Conduct Authority got its claws into the company, introducing new regulations and price caps for payday lenders, growth stalled and profits slumped. Last year, Wonga made a £37m loss.
Regulation is the major reason that Apple, Google and Facebook are so unlikely to become banks, beyond occasionally dipping their toes in payments and money transfers.
Since the financial crisis, banks – strictly, companies with banking licences that allow them to take deposits – have had to raise billions in capital, hire thousands of compliance officers and restrict bonuses. Not only that, they have repeatedly been handed multi-billion pound fines for misconduct that occurred years ago.
One former telecoms executive, who has since moved into banking, recently told me he had thought his prior industry was heavy on rules, but got a nasty shock on moving to financial services.
Is this really a world that the regulation-averse tech giants of Silicon Valley, with their freewheeling “move fast and break things” culture, want to get into? It seems unlikely. The prospect of Apple or Google mixing their highly-profitable core businesses – mobile phones and internet advertising – for the murky, volatile and capital-intensive world of banking, is remote.
Banking is now so tough that some companies with banks tacked on are in the process of getting rid of them. General Electric is selling its finance arm GE Capital, which recently came under Federal Reserve oversight, while Tesco is considering floating its banking arm.
That is not to say technology isn’t changing banking – the internet is driving the biggest upheaval to the industry in its history, with branches closing and smartphones providing 24/7 services.
But most of this innovation is coming from the banks themselves. Lenders have developed technology to provide mortgage advice via video calls, pay in cheques via smartphones and log in to internet banking with fingerprint recognition.
The importance of the internet to banking has also dramatically lowered barriers to entry, with lenders no longer needing a major branch network to reach millions of people. It just doesn’t mean that Apple will be selling you an iMortgage any time soon.
The service is slick. Hold your iPhone up to a retailer’s card terminal, and it will scan your thumbprint, access your card details and make a secure payment, without the need for cash or entering a PIN code.
Britain, thanks largely to the London Underground’s Oyster Card, is more comfortable with contactless payments than America, which is Apple Pay’s only market to date, as well as having one of the world’s highest iPhone sales rates, so when it launches, Apple Pay is bound to be a success.
When that happens, one can expect to see a string of pundits lining up to declare that Silicon Valley is treading on the banking world’s toes. Apple has shaken up telecoms and music; Amazon and eBay the high street; Uber transport; and Airbnb the hotel industry.
Banks are safe from tech's claws, for now (Getty)
Why then, is the banking sector, with its dreadful customer service ratings, scarred reputations, and general aura of unpopularity, still dominated by the same old names, then? Can’t some whizzkid in a bedroom in California undercut HSBC or JPMorgan, leading them to fade into obscurity along with Comet and the phone book?
Consumers would like to see it, apparently. A survey in America of millennials – those in their 20s and early 30s who are seen as the early adopters of new products and services –said last year that banking was more at risk of disruption than any other industry.
Almost three in four – 73pc – said they would be more excited about a financial services product from a major technology company than one from their bank. More than half think that all banks are pretty much the same, and would like to see a tech company offer something new.
In the UK, as in the US, there is a burgeoning financial technology, or “fintech”, sector. TransferWise, a company that cuts out the banks to match buyers and sellers of foreign currency over the internet and offer better rates to both, has been valued at $1bn (£640m), as has Funding Circle, which offers a similar service for business loans.
Fortunately for the banks, however, none of this amounts to much more than tinkering around the edges. Apple Pay takes only a tiny proportion of the interchange fees charged for processing payments – most of it still goes to the merchant’s bank – and if its success means more digital payments replacing cash, the banks will be happy enough.
Peer-to-peer lending represents more of a threat – analysts at Morgan Stanley reckon it could grow from 1pc of consumer and SME lending in America to 10pc by 2020 – but these are figures that hardly make banks obsolete.
What’s more, as soon as these new lenders start to gain any sort of scale, regulators start to become interested. Three years ago, payday lender Wonga (remember them?) was the darling of the UK’s fintech scene, considering a £1.5bn IPO and growing profits hand over fist. As soon as the Financial Conduct Authority got its claws into the company, introducing new regulations and price caps for payday lenders, growth stalled and profits slumped. Last year, Wonga made a £37m loss.
Regulation is the major reason that Apple, Google and Facebook are so unlikely to become banks, beyond occasionally dipping their toes in payments and money transfers.
Since the financial crisis, banks – strictly, companies with banking licences that allow them to take deposits – have had to raise billions in capital, hire thousands of compliance officers and restrict bonuses. Not only that, they have repeatedly been handed multi-billion pound fines for misconduct that occurred years ago.
One former telecoms executive, who has since moved into banking, recently told me he had thought his prior industry was heavy on rules, but got a nasty shock on moving to financial services.
Is this really a world that the regulation-averse tech giants of Silicon Valley, with their freewheeling “move fast and break things” culture, want to get into? It seems unlikely. The prospect of Apple or Google mixing their highly-profitable core businesses – mobile phones and internet advertising – for the murky, volatile and capital-intensive world of banking, is remote.
Banking is now so tough that some companies with banks tacked on are in the process of getting rid of them. General Electric is selling its finance arm GE Capital, which recently came under Federal Reserve oversight, while Tesco is considering floating its banking arm.
That is not to say technology isn’t changing banking – the internet is driving the biggest upheaval to the industry in its history, with branches closing and smartphones providing 24/7 services.
But most of this innovation is coming from the banks themselves. Lenders have developed technology to provide mortgage advice via video calls, pay in cheques via smartphones and log in to internet banking with fingerprint recognition.
The importance of the internet to banking has also dramatically lowered barriers to entry, with lenders no longer needing a major branch network to reach millions of people. It just doesn’t mean that Apple will be selling you an iMortgage any time soon.
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