A bank you never heard of has died

How many of you can hold your hands up and say that you have heard of Raphael’s Bank?

It is one owned by an archangel by the way. It is Britain’s second oldest bank and it has existed for 232 years.

What happened to cause its quiet demise? It wasn;t on the news, because few people have heard of it, therefore there was no rush to get the government to bail it out. The bank, which was a leader in lending, sold its motor finance division in 2018 and stopped lending completely in April this year, as reported in Forbes by Frances Coppola. It has also now just closed its retail savings division. Its press release said,

“All savings account holders have been given sixty days’ notice, in line with regulatory guidelines, of the bank’s intention to return their monies to them and close their accounts.”

In 2015, the bank was an active lender, though it had no high street presence and operated mainly through brokers and third parties. Its main strength was in motor finance, including mobility scooters and such like, and it was known for its range of retail and small business loans. It was also a significant provider of pre-paid credit cards in the UK, and had a string of ATMs. Coppola says, “It was, in short, a small full-service bank. Just the sort of bank the highly concentrated UK banking marketplace needs.”

However, story of its death goes back to who owns it, because it wasn’t really an independent bank, despite its independent sounding name. It is owned by Lenley Holdings, which also owns the International Currency Exchange (ICE). And Lenley didn’t want to support a small British bank, so it put it up for sale in 2016.

The expectation was that Russian and Chinese buyers would leap at the opportunity, but none emerged. Meanwhile Raphael’s kept expanding its services, including becoming the banking partner for Transferwise in the UK. And it partnered with Vodafone and PayPal in their mobile money initiative in Germany.

In fact the bank was doing very well in 2017 and reported a profit of over £22m ($28.57m), which was a significant increase on the paltry £25,000 ($32,470) of the year before.

Some onlookers say that the Brexit fiasco spooked overseas buyers, which is likely true, but then in 2018 the bank reported a massive loss of nearly £4.5m ($5.84m). The chances of finding a buyer now were rapidly disappearing, which is why it closed its motor finance and asset finance activities, and sold its motor loan book. Therefore in 2019 it was judged that it couldn’t be sold as a going concern, so Lenley decided to liquidate it.

It is not a catastrophic situation for the banking community, but it is an interesting story for startup neobanks. Just remember, even though this bank opened for business before the French Revolution, in the end it was defeated by a combination of geopolitical events and a low Euribor rate that decimated its evolving payments division.

Canada needs get ahead in fintech

Canada is an innovative nation, but for some reason or other it is lagging behind its peers when it come to new financial technology. More co-operation between the banks and the fintechs is needed if the country is not to be left behind, as Financial Post suggests.

In the summer of 2018, the Canadian government announced, “it needed someone to study the landscape for financial technology companies, or fintechs, and figure out how they were getting along with the big banks and other financial institutions,” journalist Geoff Zochone reported. As he said, “Large multinational companies have jumped out to a headstart in the race to succeed, and Canada runs the risk of falling behind. At stake is nothing less than our prosperity and economic well-being.”

Toronto-based Fintech Growth Syndicate Inc., won the contract for the study, which became a 240-page report, the first of its kind made available in Canada.

The report used only publicly available data sourced from more than 60 different websites and discovered, amongst other things, that there were “approximately 1,000 fintechs across Canada offering services or products related to crowdfunding, insurance, wealth management, cryptocurrency, artificial intelligence, capital markets, lending and payments.”

Although most of the companies were startups and had small staff numbers, when combined they employed more than 30,000 people and they had an estimated combined value of $30.5 billion. This was exciting. However, what it also showed that very few of the fintechs had partnerships with the banks. Instead the study found “Canada’s Big Five banks may have been increasing their engagement with fintechs, but “the majority of their efforts” were still on building their own products and digital experiences.”

The result is that one of Canada’s biggest industries is innovating at a snail’s pace, plus the country is lagging behind its peers in adopting new financial technologies. It also means the Canadian consumer is probably paying more for financial services than they should.

Sue Britton, director at Fintech Growth Syndicate Inc., said, “To the extent that we could find publicly available information, we were able to show that, yes, there are some fintechs that are partnering with financial institutions. But certainly the majority of those partnerships are on the financial institutions’ terms. They’re not groundbreaking new business models … It’s not going to make the marketplace more competitive, because it’s going to, in fact, if anything, grow the business for the incumbent.”

Sticking with the status quo may be Ok for the banks in the short-term, and consumers may not mind, because they are used to the ‘traditional’ banking services. And it appears that they see no need to shake up Canada’s acclaimed stability on financial services. However, as Zochone says, “the incumbents could wake up one day to find their lunches being eaten by big-tech firms such as Amazon.com Inc. and Apple Inc., which are already offering a payments solution, some more aggressively than others.”

Britton added, ““What our big banks aren’t doing is moving as quickly as other parts of the world, innovating their business models, extending financial services to more small businesses or reducing their fees.” She added, “Perhaps, as Abraham Lincoln famously said, ‘give me six hours to chop down a tree and I will spend the first four sharpening the axe,’ they are still sharpening the axe.”

Royal Bank of Canada chief executive Dave McKay reported in March of this year that he was increasingly concerned with the prospect of Facebook Inc., Amazon.com, Apple, Netflix Inc. and Alphabet Inc.’s Google (the FANG companies) getting into banking. He told Bloomberg, “They are getting between us and the moments of truth of our customers, and currently what they do with that is they sell that insight back to us in the form of search and advertising and other perspectives, and they earn a certain amount of economic rent.”

It will take time for Canada to begin adopting tech like other countries, Britton said. But it will happen.

“It’s not a blip, it’s not a bubble, it’s not a one-off,” she said. “It is the future.”

Bank-fintech collaborations are the way forward

The 2019 outlook for banking

Image result for The 2019 outlook for banking

I’ve just come across a new report from Deloitte titled ‘2019 Banking and Capital Markets Outlook: Reimagining transformation’. I was interested to read its opening sentence: “The global banking system is not only bigger and more profitable but also more resilient than at any time in the last 10 years.”

According to The Banker’s Top 1000 World Banks Ranking for 2018, total assets reached $24 trillion and the return on assets was 0.9 percent. This data would seem to say that at the end of the decade following the financial crash (caused b the banks, lest we forget) banks are in great shape. You may feel they don’t deserve it, but that appears to be the situation.

Banking health isn’t global

However, this healthy environment isn’t a global phenomenon. Deloitte’s says that the USA is ahead of its European counterparts. This is due to “aggressive policy interventions and forceful regulations” Deloitte’s claim, and the result has been healthier American banks.

By contrast, European banks have been held back by structural deficiencies, overcapacity, low/negative interest rates, and the absence of a pan-European banking regulatory agency have all likely contributed to European banks experiencing persistent profitability challenges.

European banks have been shrinking in size, retreating from international markets and exiting businesses that were profitable for them in the past. To illustrate this, just look at the fact that the profits of the top five European banks dropped from $60 billion in 2007 to $17.5 billion in 2017.  However, Western European banks seem to be faring better these days, with an ROE that grew to 8.6 percent in 2017, compared with 5.5 percent in 2016

On the other side of the world, the Chinese banks have been the big story. Not only has the Chinese banking industry has surpassed that of the European Union (EU) in terms of size, the world’s four largest banks in 2018 are Chinese. Compare this with 2007 when there were no Chinese banks in the world’s Top 10.

A recession is coming?

But the Deloitte report sees some gloom on the horizon. Deloitte economists are predicting a 25 percent probability of a recession in the United States in 2019, and this is likely to weaken US economic growth in 2020, if not in late 2019. Although we are almost at the year’s end already. And the Deloitte forecasts for GDP growth by region shows most of the regions in decline, or flatlining  just past 2020.

Where can the transformation happen in banking?

Partnership with fintechs is one approach. Deloitte says more digital transformation is required. However, Deloitte asks, “But how much of this change is purposeful and strategic? “ It comments: Banks should bolster their conviction and reimagine transformation as a holistic, multiyear process and “change how they change.”

Deloitte also suggest that the transformation “should fundamentally start with banks reaffirming their role in the global financial system.,” but it adds a warning: “Banks should discard grand visions of becoming “a technology company” and instead focus on customers, enhance trust as financial intermediaries, facilitate capital flows, and provide credit to the global economy with data as the bond that sustains the amalgam of technologies—AI, automation, cloud, core modernization, etc.—best suited for the purpose.”