Home / FSClub / Why banking will be free (Part 1)

Why banking will be free (Part 1)

Some people cannot understand why I blog everyday and so frequently, especially as it's free.  They actually think I should charge something for this stuff!

Sure, it would be nice, but I learned a long time ago that being free is far more effective than charging for everything.  In particular, I spent some time with Kevin Kelly, senior maverick and launch editor of Wired Magazine, a decade ago and he told me that everything would become free.

I thought he was nuts at the time, but how wrong was I?

Kevin has 12 lessons about how to think about the internet, and they were difficult to absorb as, bearing in mind this was back in 1997, he was far too ahead of his time.

Anyways, I went back to these lessons and re-read them today.  The reason being is due to the amazing way the internet is changing our world, as discussed above, and that it occurred to me, just like music and newspapers, banking will soon cost nothing.  Loans and payments will be provided for free.

I guess, to explain this one, we need to understand Kevin's lessons, which he put into an article entitled: "New rules for the new economy", back in Wired in 1997.

In summary, the lessons were:

1 The Law of Connection: Embrace dumb power

With everything having an inbuilt computer chip connected to a network, start thinking about how to use those inbuilt chips.

2 The Law of Plentitude: More gives more
In the Network Economy, there’s loads of everything and little of nothing. There is no scarcity, because it costs nothing to churn out more. This means the more you give for nothing, the more you get of everything.

3 The Law of Exponential Value: Success is nonlinear

Because everything is connected, small changes can explode into global and seismic movements overnight. Just look at Facebook and Twitter if you want to see this one in action.

4 The Law of Tipping Points: Significance precedes momentum
The Tipping Point – the point at which something goes from being a micromarket to the stage of critical mass where everyone has got one, like the iPod – occurs at a much faster rate and a much lower point of mass in the network economy.

5 The Law of Increasing Returns: Make virtuous circles

The more people in the network, the more value of the network. As a result, every additional member increases value exponentially.

6 The Law of Inverse Pricing: Anticipate the cheap
It used to be that quality improved with higher prices in the industrial age; in the internet age, quality improves with lower prices over time. The law of price:quality has flipped.

7 The Law of Generosity: Follow the free

Because value increases with abundance, and the cost of production is virtually nothing to create more copies, flood the market with copies of your product for free because the more who have it, the more valuable it becomes and the easier it becomes to sell product adjuncts.

8 The Law of the Allegiance: Feed the web first

Networks have no clear centre or boundaries and therefore no clear organisation. You cannot feed a network top-down, so feed it first as the only ‘inside’ now is whether you’re on or off the network.

9 The Law of Devolution: Let go at the top

Everything is dispensable. A network market domination can be replaced just as quickly by a new one. Just look at Friends Reunited, displaced by Facebook. Or AOL replaced by broadband general accessibility. Sell when you have reached the peak, not after.

10 The Law of Displacement: The net wins

The question: “how big will internet commerce be?” is irrelevant as everything will be on the net.

11 The Law of Churn: Seek sustainable disequilibrium

Instead of leaving businesses, people will just continually morph businesses and improve them in a never ending rebirth process through the net.

12 The Law of Inefficiencies: Don't solve problems

Create ideas and put them out there unformed, as the net will finish them. You don’t need to solve problems, just start ideas. Linux is a great example.

I don't intend to discuss them all, but the one that really got me back then was #7: follow the free.

Follow the free?  What, give everything away for nothing?  You must be mad.

Unfortunately, that's what everyone thought about Kevin back then, but he persevered and recently wrote an update on this one.

What Kevin was really getting at, is that the more you build a following, the more valuable you become.  The more valuable you become, the more you can charge a premium for stuff.

Today, this is far more obvious but, back in 1997, Google, Facebook, Linux and all the other good things of today's web were not around.  We were back in the AOL, Microsoft Windows '95 and fax era.

Today, it is obvious that if you have a million or more regular daily users, you can sell advertising and sell other nice 'add-ons' to those users.  But remember that these are not locked-in users.  They are more like fans.

Fans of Google, Facebook and Linux could dump these products overnight for a better version, just as Yahoo! search fans, Friends Reunited fans and Microsoft's fans have done (only a little bit in the last case).

So, this brings us back to where I started.

I blog for free because I enjoy it and one day I may turn it into a book or summit.  Meanwhile, I can tell you about all the other stuff I'm up to – the Financial Services Club in particular – and some of you might show some interest in this.

A bit like newspapers.

I get free newspapers these days, but they are paid for by the advertising in the paper and propped up by website services linked to the paper.  These days, the Guardian, Telegraph, Sun and Evening Standard get far more web traffic than any newspaper revenues or sales … and their web traffic is provided for free because each click generate advertising revenues.

This is what the newspaper industry misunderstood to start with, but now they get it big time.

It is also what the music industry misunderstood and are now just starting to get it.

These days, you don't sign music artists to write songs and sell records, you sign them to write songs and give them away for nothing so that people will follow their website, buy the t-shirts, come to the gigs and download the odd track.

This is why entertainment firms sign their artists up for 360-degree contracts these days – all the music sales and the rest – rather than for a recording contract.

Which bring me around to banking.

I've already blogged a lot about banks and social networks, Web 2.0 and all, but one thing I didn't say is that banking will cost nothing.

Just like newspapers, blogs, music and even books and live streaming rock concerts, banking will be free.

My payments will be processed for nothing.

My loans will be charged at zero margin, as will my savings.

PayPal, Zopa and SmartyPig are already dabbling with these models of new business for banking, but it is still early days.

So here's my vision of the new world order.

Banks offer me all of their administrative and transactional services for no charge.

There is no charge on being in the red and yet I still get good rates when I'm in the black.

So how does the bank make money?

First, by having millions of us in their community

Second, by partnering with firms who advertise and provide services to my millions of financial community members.

Third, by selling that community ancilliary products and services – hats, t-shirts, nice leather binders and folders, umbrellas (if you don't get this one, just look at ING Direct).

Fourth, provide me and the corporate customer with some real value, such as aggregation services, lifestyle financing advice, real-time risk management, identification of missing tricks and more. 

The latter points would be things like alerts that say: "do you know your pension will only pay you half of what you earn? top up your pension premiums now … you can afford it.  Look …" and showing me graphically and visually why it makes sense.  The same could be true for investments, loans and other products.

For the corporate customer, it might be real-time portfolio and cash management positions for treasurers to improve allocation of resources; real-time analysis of market and credit movements to ensure minimisation of exposures; real-time tracking of products and finances through global windows to financial services and supply chain systems; and more.

The fact is that it is the value the bank adds in the fourth tier that really locks me in, because the bank can then get under my skin and into my brain.

This will be the new bank model and the new bank order post this crisis will weed out those who get the follow the free model and provide real value, versus those transactional banks that are just processors.

The latter bunch will be more link internet connections – cheap, cheerful commodities.  The former group will be the banking Facebook's and Google's of the future.

I can't wait to join them.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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