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Barclays’ former CEO says banks should beware the story of Uber

Chris Ratcliffe/Bloomberg via Getty Images
Rethinking the banking industry.
By John Detrixhe
Published Last updated This article is more than 2 years old.

In late 2015, Antony Jenkins said the banking industry was approaching its “Uber moment.” The former Barclays CEO predicted that major, established lenders could be forced to cut as much as half their workforces and bank branches in the coming decade. He said that a group of new banks would become well known brands.

Nearly four years later and his predictions seem broadly accurate. In the UK, the number of bank branches has dwindled to fewer than 8,000, compared with nearly 18,000 some 30 years ago. Digital banks—known as neobanks—like Monzo, Revolut, and Starling have become household names. The financial industry hasn’t hasn’t been gutted by layoffs—employment in the sector overall has been fairly stable—but there’s no question that soul-searching has intensified about the industry’s future.

Many executives have been on the lookout for Silicon Valley-style disruption to upend the dominant financial companies. But the backlash to Facebook’s foray into cryptocurrencies revealed that regulators are far more alert to tech’s advance into the business of money than they were to Uber’s march into the business of transport. Even so, established banks face multiple challengers, from fintech startups to specialized independent investment banks. These newcomers are not deterred by the deep regulatory moat that has protected big banks for so long.

Jenkins was a credit-card executive at Citigroup before becoming CEO of Barclays in 2012, and has more than 30 years experience in the financial industry. In 2016, founded 10x Future Technologies, which sells cloud-based computing platforms to banks. Quartz spoke with him about the fintech scene, Facebook’s Libra cryptocurrency, and other hot topics in the world of finance. The conversation has been edited and condensed for clarity.

Quartz: What is your take on the universal banking model? It seems like it’s being squeezed on multiple sides, from new digital banks to pure investment banks.

Jenkins: There’s always a danger for big incumbents to assume that they’re so strong and dominant that people can’t come along and challenge that. I think what we’ve clearly seen in the last two to three years is those positions are now starting to be challenged. This is what I referred to as the Uber moment when I gave that speech, now almost four years ago.

We are seeing successive Uber moments.

People ask the wrong question about the neobanks. The question about the neobanks is not, “Are they going to be profitable in the long run?” It’s, “Have they demonstrated that there’s a market for a different type of bank experience?” And clearly they have.

What that means for the incumbents is, at a minimum, they’ve got to compete with the functionality and user experience that the neobanks are providing. And that becomes very difficult and expensive to do on the existing technology stacks that the banks have.

On the other hand, I’m not the sort of person who thinks the bank industry is going to be obliterated tomorrow, because I do think the banks that can change and get into the mode of transformation, there’s still an opportunity there. They have many, many strengths and they need to be able to leverage them. And the way to do that is to use these new cloud-native technologies.

I’ve spoken with investors who are reluctant to invest in neobanks at these valuations, but they’re ready to invest in the companies that sell technology to big banks.

Let me put it this way. If you were looking to invest in a neobank, the challenge there is customer acquisition cost. If you want to acquire a new customer, you’re talking about £200 to £300 a customer, and if you want to have 2 or 3 million of them, you’re looking at hundreds of millions of dollars to do that. If you’re looking at buying an existing bank and re-platforming onto modern technology, for a lot less money you could create significant economic value.

And a number of people in the hedge fund and private equity communities have come to talk to us about doing just that because they know if they can drop the cost-income ratio at a bank from 60% to 40%, there’s huge value creation opportunity there.

The one thing I really sense now is that increase in the rate of change, and that is going to flush out a lot of opportunities for people who want to seize these opportunities to create value through deploying the new technology. For those who aren’t engaging in that, they run the risk of falling further and further behind, and end up being quasi-utilities, never really earning their cost of capital, not particularly investable, and a bit dull and un-economic.

I spoke recently with a portfolio manager for bank stocks who thinks lenders urgently need to try new things. He’s concerned about low interest rates, shifting technologies, and a lack of experimentation at big banks. What is your take on that?

It’s interesting that you say investors are starting to see that, because I think in the past investors would have said, look, the global economy is going to right itself, interest rates will go back up, banks will have adjusted their business models to the changes required by regulation after the financial crisis, and things will revert back to an acceptable position.

But I think banks are really, really struggling to deliver that. And all the forces upon them are mostly operating in a downward fashion. Having said that, for those that are willing to embrace new technology, there’s really a lot to play for. At the end of the day, banks are regulated, they have strong brands, many of them have tens of millions of customers, they have great knowledge and expertise, and they have financial resources.

Is failure, then, a sign of success? Should banks be trying things out and accepting that some of these ideas aren’t going to work out?

Yes. We talk about failure. Well, actually, what you’re doing is acquiring learning. And we know the examples: Facebook wasn’t the first social media company, Google wasn’t the first search engine.

But what they were able to do was stacked on top of the experience of people who had come before them. The brilliance of Google was to figure out that in order to “index the internet” you had to automate that process. People were actually trying to index the internet physically by listing webpages and services. That clearly wasn’t ever going to work.

Even thinking about this in terms of success and failure isn’t really the right paradigm. The right paradigm is, are we gaining learning and knowledge and skills and capabilities that allow us to succeed in this new world? When people look at something like Facebook Libra, the question should not be whether it is going to succeed or fail. Nobody can know that. The real question is whether that going to advance the body of knowledge around distributed payment mechanisms. And the answer to that is clearly yes.

We cannot be sure about whether it will succeed or fail, but it will certainly advance that body of knowledge.

All these technologies stack on top of each other. Some of them work, some of them don’t. But unless you’re in the game, unless you’re constantly learning, you’re never going to succeed. So this notion of, “we tried some things and it didn’t work”—that’s good. What do we learn from it? How can we apply that learning going forward?

Speaking of Libra, do you think regulators will ultimately allow it to launch?

That’s the open question and there’s no obvious answer to it. My sense is that the regulators are cautious about Libra because it really goes to the heart of the financial system. But it doesn’t mean that regulators themselves are resistant to all change. I suspect this is not about whether they allow Libra or not.

It’s really about how Libra operates and, again, this is where the learning of creating distributed payment systems is really important. If you think about earlier payment systems, like PayPal or M-Pesa in Kenya, what they really proved was that there was a massive network effect. If you create a network effect, then payments become very easy because you’re just moving data from one person to another. Data in this case is money.

Clearly Facebook has a natural network in all of its properties. The question is can that be turned into a financial payment system, and that depends partly on the use case, partly on the user experience, partly on some of the technical challenges around this, and on regulation. But I don’t think we should assume at this point that regulation will be an impediment. Regulation will have to be carefully managed, and the most important thing for me is what will we learn from this, and what can we then build on top of it?