Is the Banking Industry Vulnerable to Disruption?

The internet has totally changed the face of some of America's industries. The bookstore, travel, and newspaper businesses are all totally different than they were a couple of decades ago. Is the banking industry about to be disrupted?

The Fed published a study earlier this year with some insights on the rise of internet and mobile banking.

A lot of people have smartphones. Currently, 87% of Americans have a cellular telephone. Internet-enabled phones are increasing in market share every year, and are now up to 71%. That means that about 5 out of every 8 Americans have a mobile device that they can use to connect online. 

Of all of the people who have both a phone and a bank account, 43% have used mobile banking -- 53% if you only count people with smartphones. These numbers are both trending upward over time. A lot of people use their phones to find out their checking-account balances (94%), transfer money between accounts (58%), and receive alerts from the bank (54%). Only 24% of mobile phone users have made any kind of payment using their phones.

There are innovations in payment technology, like Apple Pay. Those, however, are actually increasing the power of the large banks, not decreasing it. Each time you use Apple Pay in your local drug store instead of cash, that's more revenue -- mostly for the large banks.

We're not likely to see a large bank without any brick-and-mortar presence anytime in the foreseeable future.

1. The advent of mobile banking has done nothing to change the actual revenue-generation activities of banks -- loaning money. Certain activities, like automobile loans, can be highly automated, but that has nothing to do with mobile banking.
2. The vast majority of bank customers (84%) use an in-person branch at least once per year.
3. The vast majority of bank customers (75%) use automatic teller machines (ATMs).
4. The key difference between banks and other businesses, like bookstores and travel agents, is that in banking, the same companies are connecting with customers in new ways. The large established banks are the leaders in mobile and internet banking, too.
5. Americans have sticky relationships with their banks. Between automatic deposits and automatic bill paying, switching banks is a very big deal. Even with banking by computers and smartphones becoming more common, the top few banks are still dominant.
6. Here's the market share of banks in the United States. This is from the Federal Deposit Insurance Corporation (FDIC),  so excludes credit unions, etc. Adding up numbers from the Fed would get slightly different results.

Source: FDIC. Chart by author.

These banks compete with each other, and as we saw in 2008, any business could falter. I see the possibility of some Amazon-like bank disrupting the business model of the industry as very remote.