By Hakim Mendjeli , 4by90 consulting (This article was first published
This is the first instalment of a few articles to share my perspective on innovation, retail banking, Fintechs and competition.
If you see some value in my perspective please do let me know. As they say on youtube "like it, share it, comment on it!"
In this first piece I would like to challenge the usual narrative around Fintech discussions. I would like more focus on the end goal and whether it's achieved (i.e. winning the competition war) rather than the means (Innovation, Fintech, etc). That will
set the scene for my second piece around how we should evaluate emerging banking propositions.
It's a question of competition
That’s a fairly simple point, but I think one that is far too often forgotten. All the discussions around innovation, Fintechs, disruption, being customer centric have one purpose. The purpose is to answer the question : “How is the competitive landscape
in financial services going to change in years to come?”
"Innovation is not an end in itself"
Why does it matter? Forgetting the purpose of the debate, we risk drawing irrelevant conclusions. Innovation isn't about new cool and shiny things (unless cool and shiny can give a marketing advantage that will enable one to compete in the specific target
Lexicon (from an incumbent bank perspective)
I set out below what I think is meant by some of the over used terms we see in our industry from an incumbent perspective.
Putting customers first - part A = putting customers first in order to ensure that our offering stays relevant to the people that fund our business, hence building up our brand value, our brand being a strategic asset that will enable us to fend off attacks
from competitors. We are inspired by the strategy that the likes of Amazon have been following, especially regarding customer service, that has given them a very strong and sustainable competitive advantage.
Putting customers first - part B = We need to demonstrate to the regulator that we are putting customers' best interests first for any new products and services we are offering. That's not paying mere lip service to the regulator, but embedding in our organisation
the right culture through and through to ensure we don't have a repeat of the PPI scandal. We are still feeling the pain of the PPI debacle on our balance sheet and we have said never again.
Innovation = Due to the current pace of technological development, driven in part by Moore's law, the status quo is unlikely to last. The adoption curve of new technologies is accelerating, the future of what banking will become is highly uncertain. It's
therefore necessary that our organisations proactively invest in the new technologies and new ways of working that might enhance our banking proposition and fend off potential challenges. We don't think that a "fast follower approach" is good enough any longer.
We fear that a challenger that will have managed to reinvent the banking proposition might get traction too fast for us to respond to the challenge. Therefore being on top of new technologies and potential new propositions will ensure we can respond to any
challenges thrown at us. We also seek to explore new areas where we could make money.
Fintechs = That's a catch all term, not clearly defined and meaning very different things to different people. It tends to mean any companies that can challenge or enhance the banking proposition through the use of technology.
- New companies that claim to be able to challenge our banking propositions through a better or different use of technology. That ranges from neo banks, challenger banks, peer to peer platforms, new FX companies, etc.
- New companies that don't aim to challenge our banking propositions but could be suppliers of technology that help us upgrade our banking proposition, for instance through better UX, analytics, credit risk, security, onboarding, case management or payments
solutions to name just a few areas.
- Companies in different sectors that could compete with some of our banking propositions e.g. the GAFA (Google, Amazon, Facebook, Apple) as well as those that use more up to date technologies to provide capabilities that we use in our bank through older
What is the future competitive landscape in financial services?
The FCA has been actively working to encourage more competition in the retail banking sector. They explicitly stated that:
“ [The FCA aims to] promote effective competition in the interests of consumers in the markets for regulated financial services”. 
With at least 15 new banking licenses to be issued in the next 5 years , we should expect some change in the retail banking competitive landscape. The question remains, how much change?
In 2015 together, Barclays, Lloyds Banking Group, HSBC and the RBS group represented more than 90% of the UK retail banking sector.
I strongly believe that this crushing dominance will be eroded in the next 5 years. The question is to which extent. Will we see a marginal or an extensive erosion of the big 4's market dominance?
Extensive or marginal impact of competition?
Extensive erosion of incumbents' market share?
According to McKinsey Panorama report, by 2025 “Fintechs” threaten from 20% to 60% of retail bank product lines (graph below).
What might be the pace of such drastic erosion? Will it be similar to the Low Cost Carrier disruption of the airlines industry? The below graph shows that the LCC captured capacity share fairly linearly year on year, over a 10 year period.
(example taken from the excellent article from Huy Nguyen Trieu on
"3 Fintechs business models" )
Mild erosion of incumbents' market share?
Another potential scenario of the change in the competitive landscape is a more benign one (at least from an incumbent persective). In this scenario, the increased competition results in a 10% market share for the new entrants, hence roughly 2.25% for each
of the big 4 banking groups.
(Again this example is extracted from the previously mentioned article)
What do I think will happen?
In view of the level of investment in Fintech and the "hype" in the financial services industry the perception is that we are more likely to see an extensive challenge of incumbent competitive position rather than a mild one.
I personally don't believe the case has been credibly made (at this stage) that this will happen. The only given is that there is increased competition to be seen. Whether or not incumbents can respond effectively to these challenges through their "digital
transformation" initiatives is still to be seen.
I will leave it for today on a great quote that summarises the hurdles that small challengers face:
“The battle between every startup and incumbent comes down to whether the startup gets distribution before the incumbent gets innovation.”Alex Rampell, Andreessen Horowitz 
Take a moment to let me know what you think about this first piece. My next article should be called "Why challenger banks need to be 100 times better than incumbents to succeed - today" that might change though.
 Extract from the FCA’s objective under the financial services Act 2012
 George Osborne statement at the IMF spring meeting 2015: http://www.ft.com/cms/s/0/e01d5838-e50a-11e4-bb4b-00144feab7de.html#axzz3wSOH99sf
 Quote from Alex Rampell extracted from article on distribution vs innovation, Andreesen Horowitz blog: http://a16z.com/2015/11/05/distribution-v-innovation/