Banking Competition and monopolies

“In the early 90’s government subsidised military communications companies such as Motorola (US) and Sagem (France) and considered adapting some of their field coms solutions to create a civilian mobile telecommunications service. Established landline operators vigorously opposed such unfair competition and, although most of them were still state supported at the time, they successfully thwarted the unruly attempt that would have certainly caused huge disruption to telecom networks and decreased the quality of service to customers”.

Above is the hypothetical tale of what happens if you let incumbents decide what is fair or unfair in terms of competition and technology evolution. Ana Botin’s latest column in the FT (Jan 4th 2021), is openly complaining about the significant advantage given to Big Techs in the growing contest around digital finance and digital business banking driven by technology platforms.

Although she does mention the 2008 origins of the harder constraints on liquidity and higher regulatory capital for banks as per Basel III, she forgets to mention that, similar to the landline telecom operators in my tale, most of the banks in the World first required massive tax-payer funded bail-outs.

Thanks to the Coronavirus crisis, these strict requirements, established to guarantee that yesterday’s mistakes and recklessness are not repeated, have been temporarily lifted. The temptation for incumbents in the banking world to try and overturn 12 years of regulatory work is now even greater.

In truth, this is not the solution to the banking industry’s problems.

Firstly, because increasing lending capacity when the default rate on business lending is expected to skyrocket post-Covid-19 would again result in exposing the banking system to heavy potential losses on bad loans.

Secondly, because liquidity is not the real problem. Despite the massive quantitative easing and negative interest rates, most western banks ROE (Return On Equity) is below 2%, as per a McKinsey Banking report from 2018. And it is inaccurate to say that Big Techs are “lending”. The case of ANT Financial is a noticeably clear example.

Alibaba’s subsidiary, the largest payment company in the world, has actually helped lenders place their massive excess liquidity by offering easy and convenient access to business borrowers acting as simply the technology “conduit”. This is similar, but on a much larger scale, to what Funding Circle is doing today in the UK.

If Big Techs have an advantage today it is because they have built the very same “Conduit(s)” and can access hundreds of millions of potential customers, including a herd of businesses, via their various platforms.

So, the real issue for traditional banks is the need to catch up technologically while having to invest massive resources to maintaining obsolete, legacy IT systems. And Ana Botin is asking the regulators to tell the Big Techs to push “pause”, while the banks are catching up and building alternative channels, away from their legacy systems. Which is by the way, what Santander, the bank that Mrs. Botin is currently Chief Executive, has been doing more actively than most.

Beyond all that, if incumbents are to preserve their status in tomorrow’s financial ecosystem, they have to restore their relationship with businesses. If so many of them are and will be turning to digital banking solutions, it’s not because of the liquidity ratios or a love for Big Techs. It’s because corporate banking, especially around cross-border transactions, has become overly painful, complicated, costly, time-consuming and inefficient. For many, even opening an account is now a challenge and paying suppliers in other continents or receiving funds from overseas can take days and weeks.

Digital banks are allowing business clients to return to centre of the equation, and this is what Santander and its management should be really worried about.

The author is Simon Tobelem, the Forbes featured CEO of ARIE Group, a Financial Services Group based in Europe, Africa and Asia, who  launched in 2018 the first native digital regulated Investment Bank in Mauritius