Which major industry is about to suffer huge upheaval, disruption and turmoil from the impact of digital technology? Transport has a distance to travel, even if Google is making a lot of noise about driverless cars. Shopping is already there and never mind publishing or entertainment – the volcanoes have been erupting for years. No, the industry that is cowering in fear of imminent attack by the armies of Silicon Valley is financial services, and if you were brave enough to bet against a global industry, you would short sell the banks.
Google and Apple are at the gates of high finance with a battering ram and the defences have been breached. The tech companies are carving out huge segments of traditional banking business, standing between the banks and their customers by offering apps and mobile payment systems. Consumers are fleeing bank branches faster than the institutions can close them but banks are struggling to build mobile digital banking fast enough to keep the likes of PayPal and Apple Pay at bay.
If you think the language of conflict is exaggerated, ask David McKay, the chief executive officer of Royal Bank of Canada, who two weeks ago in New York told an audience of investors and clients that RBC was "on a collision course" with the tech companies.
The problem is straightforward: If a bank like RBC allows its customers to shop and do transactions with a cellphone app from a tech company's platform, it allows a rival to stand between the bank and its customer. Alternatively, if it ignores the challenge, the bank risks becoming redundant in a digital and increasingly mobile financial world.
Mr. McKay's strong language was echoed this week by Anthony Jenkins, the boss of British banking group Barclays, who warned that "the full disruptive force of technology" has yet to be felt by industry. Mr Jenkins was touting his own bank's response to the challenge, including BPay, a wristband that operates as a payments system for small sums and Pingit, a mobile phone payments system that the Barclays is now launching on Twitter.
In a highly aggressive move, the bank is offering Pingit free to all Twitter users who can use their Twitter handle as a payment reference. " You may well ask why we are offering a free service and disrupting the payments sector of which we are an incumbent. But we believe maintaining a leadership position [in technology] is critical," Mr. Jenkins said.
North American banks should keep a close eye on Britain where the digital battle for market share is already under way. According to the British Banking Association, mobile phone banking use doubled in volume in a year in 2013 to almost 19 million transactions a week.
For the banks, it ought to be a no-brainer – industry research suggests that it costs a bank $4 to conduct a customer transaction in a branch compared with 4 cents over a mobile phone or the Internet. However, shifting from a business model built on face-to-face contact within real estate to one involving interaction between a mobile phone and a server is not something that can be done overnight. Incumbent banks may therefore be vulnerable to attack from new-model entrants, such as Atom Bank, which plans to launch this year as Britain's first digital-only retail bank, providing payments, current accounts and mortgages without the cost burden of face-to-face banking.
The threat of "disintermediation," the new banking industry scary word that simply means cutting out the middle man, would be bad enough. Worse still, is the notion that this might be a war of attrition. In other words, the new technology is arriving at a time when the banking market in the rich Western world is about to shrink.
While the tech companies grab the wires and levers that hook up banks and businesses with payments infrastructure, other challengers are biting at the soft underbelly of the banks. Peer-to-peer lenders are challenging the grassroots consumer and corporate lending business of banks by matching individual investors with would-be borrowers. Canadian tech entrepreneurs have launched Grouplend in Vancouver, seeking to mimic the success of America's Lending Club or the U.K. peer-to-peer innovators, Zopa and Funding Circle.
The question is whether these novel credit infrastructure providers are creating a new market or just taking the higher-margin cream from the banks lending business. If banks are left with the task and expense of protecting depositor money from loss and servicing the needs of borrowers – many with indifferent payment records – their profitability is likely to erode and their cost ratios will deteriorate.
At the same time, the corporate lending businesses of the traditional banks are being hit with a flight towards cheaper money in the bond markets. With the cost of lending for the top credits approaching zero or even negative rates, it is difficult to see what advantage remains for a corporate treasurer in a large company to borrow money from a bank. Pension funds, desperate for yield, are also muscling into traditional lending markets, picking off the mid-cap customers of the banks. The pension funds offer keener rates and lower costs, again cherry-picking the banks' better clients.
Battered by regulators, ridiculed by politicians and hated by consumers, the last thing the banks need is a disruptive technological challenge. Yet, if they have the imagination and the courage to adapt, it could be a way for these lumbering institutions to find a route back towards the respect, if not the affection, of a younger group of consumers.
For Canadian banks, the challenge could be even tougher. These are institutions that pride themselves for the conservatism that enabled them to escape the financial crash. It's a mindset that avoids excessive risk but also abhors change. The question is whether Canada's banks are the nimble creatures they need to be to provide financial services in a mobile digital world.
Carl Mortished is a Canadian financial journalist based in London.