When Apple’s new iPhones were launched earlier this week, there was the usual hype and hoopla. The Apple fans were predictably wowed by the bigger screen sizes and the whizzy new functions the designers have come up with, while the Android groupies just as predictably dismissed it as old hat.
But the new phones’ biggest impact might not be on the mobile telecoms or technology industries, but on something far older, and more prosaic: banking. You see, Apple also announced a new payments service this week, Apple Pay. And this service will be available on both the iPhone 6 and the iPhone 6 Plus.
Mobile payment systems have been under development for years, but Apple’s new service may be a game changer. Apple is very good at taking new technologies into the mass market, and that might be about to happen again.
The problem for the banks is that if they lose their grip on payment processing, they don’t have much else to offer. And if banking is the next industry to be disrupted by the internet, then the index that is going to suffer from that the most is the FTSE 100. More than most other major markets, it is top heavy with some very large banks.
Technology companies have been working for some time on mobile payment systems that allow people to pay for stuff automatically via their mobile. Google has its Wallet, and there is a host of rival systems. It is very like the MP3 market a decade ago, or the market for tablet computers five years ago.
Most of the development work has been done – it just needs someone to take it into the mainstream. It is not hard to figure out the appeal. Instead of looking around for a cash machine, or paying with a card and a pin number, the money just gets debited automatically via your phone.
But that will pose a huge challenge for the banks. All the main high-street players offer a range of products to their customers, from savings accounts, and mortgages, to Isas and insurance policies. But it is the current account that is their core business.
The banks control the processing of money from one place to another, and it is that which gives them their lock on the financial system.
Slowly, internet companies are chipping away at that lock. PayPal is better at processing payments between individuals and small businesses. It is way, way cheaper for anyone who needs to send or collect money across borders – something that is increasingly common in the globalised economy.
Apple or Google may soon be better for the cash you keep in your pocket, and may soon offer a better system for paying for large items than your debit card. From the other end of the market, peer-to-peer lenders are chipping away at the savings account and loan markets. Very soon, the banks might not have much left apart from a lot of large Victorian buildings on every high street.
Plenty of big companies have already been blown apart by the internet. There are not many travel agents left on the high street. The record companies are a shadow of their former self, and the big publishers are being reduced in size and influence by the rise of e-books. There is no reason why the banks should not join them. After all, it is not as if they have much to fall back on.
For years they have been mis-selling PPI policies and overcharging for overdrafts. At the same time, they have hollowed out their organisations so that even the wealthiest customers have to wait for an hour on a call-centre line before they can speak to anyone. Their brands have beenshot to pieces. There are no other big companies that have been quite so careless about their relationship with their customers as the banks.
Without control of payment systems, the banks may very quickly find that they do not have much else to offer. They have largely forgotten about customer service, and that is a skill that cannot be relearnt in a hurry.
They don’t have even a fraction of the brand strength that Apple, or most of the other web giants, have. Once a tipping point is reached, and people start to realise they don’t really need a bank to do anything any more, they may go into steep decline very quickly.
No one will miss them much, just as no one misses the old-style travel agent. But shareholders will be hit. Once a company loses its grip on the market, its share price can go into free fall. Just take a look at Tesco, down from almost £4.50 to less than £2.50 on what is so far a fairly modest decline in market share.
Share prices could halve rapidly, wiping billions of the market value of some very big companies. Nearly every country has some big banks in its main index, but with the exception of Switzerland, none has the same concentration of them as the FTSE 100. HSBC, Barclays and Lloyds are all top 20 companies.
There are plenty of threats to UK share prices, from the election of a Labour government, to the possibility of Scotland breaking away, to the Bank of England raising interest rates. But the rapid decline of the banking industry is the one factor no one has planned for – and which could turn into the biggest danger for the FTSE 100 over the next few years.