La Caixa with 344€Bn in assets and >5000 branches is the largest bank in Spain. It provides and delivers banking and social services. The bank reinvests a large part of its profits in social initiatives, ranking as the 4th biggest non for profit contributor in the world.[i]
Traditional banks, and especially in Spain, are struggling to remain profitable for three reasons: (i) in spite of the low interest environment there is simply no demand of credit; (ii) new online only banks (Bankinter, EvoBank, etc.) with a much smaller cost base are starting to gain relevance; and (iii) the next generation of customers, the millennials, are not willing to pay for most of the services that banks provide since they are getting them for free from some of the new fintech startups.
The last two are direct consequences of the digital revolution that has enabled them. Traditional banks are being forced to make adjustments to their business and operating model to remain relevant. La Caixa has made two big bets in this regard:
Mobile First: The first step that La Caixa has committed to is taking a page from Mack Zuckerberg’s book[ii]. La Caixa decided that they would skip being a leader in the web and move directly to a mobile-first strategy, they created ImaginBank[iii].
The account and all the services are only accessible through a mobile phone (to reduce the cost base) with the exception of cash withdrawals, which will be able to capitalize on the broad traditional network. The app also offers several services that cannot be found on a traditional bank account, but offer great value to the customer at small cost to the entity, such as a Venmo-like service.
While the idea of going full into a digital/ mobile experience is good, they might be digging their own grave by not differentiating themselves from all the fintech noise. The main risk that I see with this bet is that tech is a winner-take-all market[iv]. The banks are playing an uphill battle because these technologies already have millions of users and many adjacent functionalities. On top of that this technologies usually offer cross-bank and cross-platform functionalities, which is arguably in opposition to the banks’ short term goals.
In conclusion, banks can offer as many of the functionalities that are already offered by smaller players as they want, but the question is whether the consumers who are already on those platforms will abandon them for yet another app from their bank which is not as good as any of the alternatives by themselves and limits their interactions.
To defend form this risk the banks could pull together to address cross-bank issues, as all the Spanish banks are doing against Venmo[v], or start acquiring[vi] the startups (for their user base rather than the technology) while the banks are bigger than them.
Data hubs: >80% of transactions in Spain involve a credit or debit card[vii]. Banks are the main distributors of credit cards in Spain and are in the middle of the >2.5 billion yearly transactions[viii]. During the years they have created a huge transactional database. Until a few years ago this information could not be leveraged. However, the increase in cheap computational power and development of machine learning techniques have enabled them to both increase their topline through cross/upselling of their own products or selling information to selected partners and to improve their return by developing better risk scoring systems or reducing their compliance costs[ix].
This has been a great idea and source of value for traditional banks for the past few years, but in 2014 Apple and Samsung launched their own payment platforms which now aggregate the information that only the banks used to have. In the short term neither Apple nor Samsung are issuing their own cards and act just as another layer between the consumer and the bank. However, if in the near future they start providing the credit[x] (themselves or via partnership), they could black the banks out completely.
The only possible way to defend from this seems to be the same as the way to defend from small fintechs detailed above: pull the resources together and not compete against each other. Several banks are launching their own eWallet platform[xi], but none of them by themselves has the potential scale[xii] that the iPhone and Samsung do.
All in all La Caixa is a best practice in adaptation to the digital revolution both by launching new initiatives and improving their old operations. However, to keep new players gaining momentum in the finance market, be it small startups or big tech, they will need to bring their current competition along to create a winner-take-all tech platform and keep making money in their currently untouched lines of revenues (e.g., mortgages). (800 words)