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Brexit and digital banking: the follow-up

In the days immediately following the referendum, we published a blog post discussing what the implications of Brexit for digital banking might be. We suggested that, in some ways, the UK leaving the EU might actually be good for digital banking, as the costs of regulatory change and a potential hit to consumer confidence could lead banks to accelerate the closing of branches and force banks to greatly enhance their digital offerings. Obviously this was a shift already in motion, but we predicted that we would see initiatives to push digital banking amplified.

The news last week that Lloyds Bank will be closing 200 branches and cutting thousands of jobs was obviously met by some speculation that it was a response to Brexit, a rationale the bank was quick to dismiss. The decision was undoubtedly taken before the referendum (potentially with a different voting outcome in mind).

Overall we are anticipating that there will be significant time lags before we really see the consequences of Brexit. Indeed, any economic woe or success in the months following the vote being attributed to Brexit is ignoring the realities of economic modelling and the time taken to produce meaningful economic statistics. So we are certainly not claiming that we have got it right at this stage.

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At Mapa, the question we’ve been tackling has changed from “what happens to digital banking?” to “what happens to innovation in digital banking, and where is it going to come from?”

In the aftermath of the referendum there was concern that the UK (and specifically London) might lose its position as a global hub for FinTech. This fear has waned, as most leaders now support the notion that EU citizens already in the UK should be allowed to stay (although they might choose to leave) and as it now looks like Article 50 will not be triggered until sometime early in 2017. Either way, it’s of limited importance where FinTech start-ups are looking to operate: partially because FinTech is about disrupting financial technology, not really about disrupting banking, but mainly their geographic location is unlikely to stop them working with UK banks. Indeed, what really matters is the banks’ appetite and ambitions when it comes to innovation, as it is this that dictates success or failure in the FinTech space.

It’s key to understand that turmoil, crisis and cuts are not a block to innovation. In fact the opposite is true; they are a stimulus for it. Put simply, innovation is about solving problems, and a bank without challenges does not need to innovate.

It’s possible to draw parallels with the financial crisis. While “the crash” and Brexit are certainly not comparable for many reasons, we may see some similar long-term effects. Namely that banks will further embrace digital servicing to maintain mass-market relevance and broad customer bases, rather than cutting away unprofitable units and shrinking their businesses and product lines to maintain a certain level of profitability.

The financial turmoil of the late 2000s has arguably put banks in a good place to overcome any challenges thrown-up by the UK’s (eventual) exit from the EU. Not necessarily in terms capital requirements, stress testing, conduct risk or the other regulatory transformation we have seen, but rather in relation to a change in culture. Banks now understand the need to a focus on helping customers’ achieve their goals and creatively driving the development of digital banking.

There is little need to worry where innovation is going to come from: if the banks want it, someone will provide it. Indeed, we live in the age of buy, build or partner, and it’s never been easier to create and deliver new tools to customers.

It will be interesting to see in a few years’ time (or whenever Brexit happens) if we will be able to mark June 2016 as a decisive turning point for digital banking. A great deal depends on the banks: will they adopt a gradual, conservative approach or will Brexit be the backdrop to an exciting new wave of innovation in digital banking? We remain cautiously optimistic that it might be the latter.

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