Can banks survive?

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PARIS, March 19 (UPI) -- The conventional wisdom says that debt and regulation are the big challenges for banks, most of them scrambling to recover from the financial crisis. But the real question is whether retail banking as we have known it will exist after this decade.

A lot of thoughtful bankers fear their business could be overwhelmed by a tide of technological change bringing Pay-Pal, Google Wallet, Facebook credits and Apple, Amazon and Vodaphone all flooding into their market.

"Once Apple, Samsung and others charge a fraction of financial transactions, the industry changes," suggests Banco Sabadell's Miguel Montes.

A survey of more than 1,000 banking executives by the Finance and Information Management center at Germany's University of Augsburg indicated that 88 percent of respondents "believe Google, Amazon and Facebook along with specialized Web-based financial service providers will play a bigger role in bank services."

Noting that such companies are "already perfectly positioned for a digital and mobile world," Professor Hans Ulrich Buhl sees them bringing intense competition, technological savvy and their own huge customer and data bases to the industry. Apple, for example, saw 25 billion apps downloaded onto its devices in 2011.

"Gaining just a percentile of the customer base, which oftentimes exceeds half a billion users, can immediately turn a large Internet company into one of the world's leading retail banking service providers with transnational services," Buhl notes.

No doubt large numbers of older customers will be reluctant to shift from traditional relationships with their bank and checkbooks and the people its brick-and-mortar branches. But many have already become accustomed to online banking and the digitally-skilled Facebook generation is used to buying online and often by-passing the banking system by making purchases through PayPal.

And even the Internet-shy are deserting traditional banks to use the credit cards and banks of big retail operations like Tesco in Britain. Such stores know vast amounts about their customers thanks to their loyalty cards and their massive daily positive cash flow can now be used to finance their own goals. The payment comes to Tesco and it can keep it and use it, rather than, as before, being deposited with a retail bank.

"Payment is the bedrock of the business-to-customer relationship," says KBC Bank's Philippe Meersschaut. "Lose payment, lose the relationship.

The key question will be who gets to control the various payment mechanisms. There are several contenders. Could it be the telecommunications corporations like Vodaphone, ATT, Orange and D-Telkom? Vodaphone executives already say that by 2020 they expect half of all financial transactions to be made by phone and are building the infrastructure to cope.

They see the coming of the e-wallet as their killer app, the key to their success. Using mobiles phones to make payments has long been seen as a way to make cash and credit and debit cards redundant. But it could also be a way to undermine the traditional role of retail banks.

There are more than 5 billion mobile phones in use; not quite one for every member of the 7-billion-strong human race but getting close. Sweden's Ericsson says that by 2016 there could be 3 billion smartphones in use, which would mean almost half the human race permanently connected to the Internet.

But other contenders include online banks like ING, or the Internet companies with the massive customer bases like Apple, Google and Facebook, or the big online sales operations like eBay or Amazon.

These companies may have a killer app of their own, which could trump the power of the mobile phone. Their power lies in their vast data bases. They know a great deal about their customers: what they buy, where they live, how much they spend and on what. They can mine that data to assess a potential customer's needs for different kinds of financial services, almost before the customer knows it. For example, when a customer buys baby clothes, they are likely to be interested in ways to save for eventual college fees.

"The ability to process data and distill relevant information will be a key differentiator in retail banking," says Martin Kolouch of Austria's Raiffeisenbank.

What nobody really knows is what the customer of the future will want, beyond a place that he or she trusts to take care of savings and make them grow and an easy way to pay bills and make purchases. But the customer will probably also want a place that can make affordable loans for major purchases like a house or car and perhaps be a source of reliable advice for the future on things like pensions and college loans.

Over the years, retail banks built their business model on providing one-stop shopping for all the above services. Now they are trying to figure out whether they will face competition on all of these fronts at once, or will they have their core competences picked off one by one.

At the same time, of course, retail banks are under pressure from regulators to increase their core capital, and from governments to kick-start various national economies by increasing their lending to small and medium-sized businesses. But the real threat is the way technology is now changing the whole basis of banking.

They are like the dinosaurs, just after the meteorite hit but before the sky turns black, the forests burn and their entire ecosystem collapses. Can the banks adapt fast enough to survive?