A Series Identifying Trends, Challenges and Opportunities Banks and Bankers Will Face in 2015
In Part-1 and Part-2 of this three-part series, Banking Reports, Ltd. Research, a leading research firm covering the banking industry, identified six significant trends that are projected to impact the banking sector during 2015. These trends have included: Apple Pay, FED rate-hike, African banking, the Chinese banking system, crypto-currencies and commodity-sensitive economies. In this final installment, Banking Reports will explore four final trends and how they will impact the industry this year, including: PayPal, FinTech vs. FinServ, Europe's struggles, and the biggest challenges and successes for the upcoming year.
Trend #7: PayPal
PayPal is currently a wholly-owned subsidiary of eBay, Inc. Due to long-mounting shareholder pressure, eBay announced that it is going to spin off PayPal into an independent company in 2015. We think that this is likely to bring on major changes in the global online transaction scene. But, why is it so important that PayPal is becoming an independent company?
- Tactics versus strategy: PayPal is a digital wallet; eBay is an online marketplace. The marriage of the two seems to make tremendous sense. Still, when PayPal became the wholly-owned subsidiary of eBay in 2002, the skyrocketing success of the global digital wallet started to slow down. Why? We think that the answer lies in PayPal loosing its independent strategy upon becoming part of the eBay universe. eBay only ran PayPal as a tactical entity, something that – producing less profit than the core activity of being an online marketplace – is exciting, has potential, but lacks strategic importance. It is understandable from eBay’s point of view. But, by reducing PayPal to a tactical level, it lost its original ‘superpower’, its tremendous strategic transformative potential that the great strategic geniuses (Elon Musk, Reid Hoffman, Peter Thiel and others) originally gave it. The key question in this regard is: to what extent will PayPal regain its strategic independence upon being spun off? So, from PayPal’s point of view, tactics killed strategy in 2002, and the question of 2015 is: how much of it can be regained?
- From digital wallet to ‘de facto’ bank: PayPal’s way of doing a digital wallet is very strong. This product-side strength is combined with the fact that PayPal is a very strong and well-established global financial brand. These two strengths are sufficient to provide a basis for going one step further and really tapping into the banking business. We can very clearly seem based on our research, that there is much space between PayPal’s current activities and the activities that require becoming a full-scale bank from the regulatory, legal and foremost compliance side. There are two questions: (1) Will PayPal’s new ownership structure open up the courage and ability of the company extending its activities into the space between current activities and a full-scale banking license? (2) Does PayPal want to start 'de jure' banking activities in the future or is it enough to expand into 'de facto' banking areas?
- New owners: There is much rumor about PayPal’s potential new owners. We think that it is a strategically important thing who actually owns this asset. We are looking at nine potential types of owners: (1) Apple, Google or Yahoo buys PayPal; (2) Amazon or Alibaba buys PayPal; (3) The original owners buy it ‘back’ from eBay; (4) eBay does an IPO of PayPal and fragmented ownership-structure emerges; (5) A bank buys PayPal; (6) A card company buys PayPal; (7) An online forex transfer service buys PayPal; (8) eBay changes its decision to spin this asset off and keeps PayPal’s majority stake; or, (9) Any other potential ownership structures.
Each possibility deserves independent strategic analysis, but that shall be the subject of a future series of blog-posts!
Trend #8: FinTech versus FinServ
FinTech refers to Financial Technology, covering the range of small startups to global brands, like Apple Pay, trying to revolutionize the traditional world of financial services. FinServ refers to Financial Services and, in this context, the expression has an overtone to point at large brick and mortar banks and other well-established, traditional financial services providers. Consultants often position these two (FinTech vs. FinServ) as ‘either/or’. We think it is going to be more complex than that. Why?
We have identified five major ways this arena may evolve. These ways – we think – are going to be parallel:
- Fully digital financial service providers will slowly lean towards opening up physical outlets.
- Brick and mortar banks will slowly lean towards embracing FinTech-type of services and channels.
- FinTech companies will obtain full-scale banking (and to a lesser extent: insurance) licenses.
- Banks will cooperate with FinTech companies, including acquiring them, taking majority ownership in them, taking minority ownership in them, starting up joint ventures with them, signing strategic alliance agreements with them, and all other forms of cooperation.
- Regulators, supervisors and legislators will struggle to provide a constructive, relevant, equal, smart, competitive and safe environment that is accepted and respected by both the clients and the FinTech-FinServ community.
Trend #9: Europe Struggling
Europe is struggling – it is hard to find a banker or economist that thinks otherwise nowadays. And, we agree. We think that most of Europe’s problems are non-economically originated but cause significant economic symptoms. We will now only list the top 10 symptoms in decreasing order of severity.
- Divergent monetary aggregates and lack of fx rate equilibrium in the Eurozone
- Inefficient redistribution of fiscal resources by the EU
- Deflationary pressure
- Highly-inflexible labor market and youth unemployment
- Lack of cooperation between the member-countries on policies like defense and other areas that would carry significant synergies and economic efficiencies
- Problematic balance sheet of a number of major, mid-size and small banks
- Schizophrenic approach and ambivalence between fiscal redistribution as a certain type of stimulus (EU funds towards weak countries) and serious austerity measures, mixed with strict fiscal discipline
- Lack of growth and lack of a realistic growth-engine
- Weakening "Four Freedoms of EU”, as known originally, by partial short-term political interests. “The Four Freedoms of EU” are the free movement of:
- Weakening market confidence toward Europe and its short- or mid-term prosperity.
Trend #10: The Best and the Worst in Banking in 2015
The Best: Myanmar
We think that Myanmar’s banking system is the best-kept secret in town. Myanmar is a highly-problematic banking environment full of difficulties, constraints, risks and obstacles that make it an almost impossible challenge to enter by major international banks. Still, we think that it is worth keeping our eyes on. The three major reasons:
- Market economy is being formed: Political and institutional changes that are quick, firm, significant and highly beneficial. E.g. serious steps towards a truly independent central bank.
- Growth is strong: A market of cca 65 million with an annual growth rate of 5 – 15 percent.
- Penetration is low: It is a little known fact that Myanmar’s population is more underbanked than most African nations. Only cca 5 percent of the adult population has a bank-account. We expect this rate to sky-rocket.
The Worst: Russia
Russia has nearly 1,000 full-license banks (out of the cca 25,000 full-scale banking licenses worldwide). Russia is a heavily banked country. It has always been a risky market, but risks often paired with high returns. We think that a highly-volatile and overly-risky period is coming that we think is best to consider keeping away from. The five major reasons:
- Russian fiscal and monetary reserves are shrinking fast.
- Ruble is in an exchange-rate crisis that we think is going to worsen.
- Inflation is little-anchored.
- International financing is 'de facto' cut off from Russian banks, and, therefore, there is a denominational pressure in their balance-sheets.
Russian real-economy is absolutely monolithic in terms of being dependent on energy-prices. Quickly shrinking energy prices, therefore, have put unprecedented pressure on the revenue side of the bottom-line of major Russian companies, while an overwhelming dollar denominated financing of these companies have distorted the cost-side (by USD strengthening while RUB weakening significantly).
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This post was written by David Gyori, Executive Director at Banking Reports, Ltd. Research. Mr Gyori advises banks and bankers on how to win in a changing global banking-landscape. He has been working as a banking researcher and consultant for nearly 15 years. His favorite methodologies are research-based report-writing and research-based consulting. He is an enthusiastic squash player and a coffee-lover.
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