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If banks are like oil, build better vehicles

I bet Venessa didn’t realise what she had started when she had her rant the other day, but I’m enjoying the thought process started by Venessa’s reactions to SIBOS, my reactions back and the reactions of the community reading these entries in their commentary and thoughts.

In fact the commentary is great, and I appreciate everyone’s words of wisdom which has potentially unleashed some real forward momentum in building a hybrid social finance model.

As a result, I’ll keep pushing on this door whilst it’s open.

First, a key question: if banks are oil, how can you build better vehicles?

I think we’ve been arguing the wrong point when we attack the banking system per se, as the core of banking – the bit that it really exists for – is to oil global trade, as opined by Stephen Hester, CEO of RBS.

At the SIBOS plenary session, Stephen reflected that there had been a crisis in banking, and that “the world has seen that crisis but not reacted by turning in on itself, but recognising instead that globalisation is still the model that creates the greatest wealth for the greatest group of people, so it must be continued. This means the financial system has to maintain its place as the oil in the globalisation process and for information exchange.”

So banking is the oil of commerce and society, providing the ability for individuals, businesses, countries and governments to trade.


Oil as an industry is a good simile in fact.

For example, we don’t start with saying: “I want some oil”, just as we don’t wake up saying: “I want to make a payment”. We start with saying: “I want to get from A to B in the most comfortable way” or “I want to buy something”.

In the case of the journey, for some of us it means buses; for others, it means a car; for a few, it means a Ferrari or Porsche; and for a rare few investment bankers, it means a private helicopter.

All of these vehicles run on oil and if we think of banking in this way, then we are we attacking the oil rigs and refineries?

We want those to be safe and regulated, especially after the BP Deepwater Horizon oil spill.

What we should be thinking about is the vehicles that run on oil and (a) try to come up with better, cleaner, more fuel efficient versions of these vehicles; and (b) a way to switch from oil to other renewable energy sources.

And I think that’s the discussion we’re having here, so let’s start with how to come up with better vehicles? Tomorrow, I’ll tackle the idea of switching from banking to other fuels of finance?

Oil is an industry that needs regulating and banking needs regulating, especially after the credit crisis.

So what does this mean?

Well regulation limits competition.

We haven’t seen many new oil firms launched in my lifetime, but then who would want to be in that industry after Exxon Valdez, Piper Alpha and now Deepwater Horizon?

It’s a dangerous industry that could destroy our planet but, whilst we need oil, we live the risks.

However, we limit them by avoiding too much competition to create too much risk in the oil refinery system.

This is equally true of banking which is why there is so little competition in the core of banking.

For decades, we have said that banks will be disintermediated, and yet I cannot think of one core area where banks have been disintermediated.

I tweeted this recently, and various folks came back with examples like savings products leaving banks and moving into mutual funds.


But savings is not the core of banking.

Deposit accounts are the core of banking.

And that’s where I’ve seen zero disintermediation.

That is not to say it has not been tried.

Variously, new competitors have arisen as prospective dethroners of the banking industry.

Over time, they all disappear just as fast.

In 1994, Bill Gates described banks as “dinosaurs”, only to retract the statement thereafter (see note 1).

In 1996, Tesco said that banks are “a bunch of clowns”, and launched their version of banking (see note 2). But it wasn’t banking at all.

In 1997, Virgin entered the fray, with Richard Branson saying “…executives cross the Atlantic on a Virgin plane, listen to Virgin records and keep their money with a Virgin bank”. But it was a damp squib that was launched, struggling for years nibbling away at credit cards and savings products, but not really changing the game.

Even back then we spoke about telecom firms, retailer, car manufacturers and others eating the banker’s lunch.

We then finally did see a major new force in banking arrive: PayPal.

But they were just icing on the cake of the banking industry’s ingredients.

They weren’t replacing anything.

Then, when they got big enough, they too became a bank.

So they are disrupting but not displacing banks, and I am still waiting to get my PayPal deposit and checking account.

Today, we talk about the future being mobile carriers and Facebook and social finance being the future.

We even bring in Apple.

Just the other day, Techcrunch ran this headline: Apple’s Next Big Strategic Opportunity Could Be Mobile Payments

Apple Bank

Oooooooh … Halloween scary that headline.

Mind you, it reminds me of this one from eleven years ago:

Microsoft Bank 

Source: Marketing Magazine, 1999

Will Apple kill the dinosaur banks?

I don’t think so as no bank has died, apart from a few small ones, and most banks have seen little disintermediation of their core service because, like oil refining, it’s a high risk and highly regulated area.

This is why all of these attacks on the banking system over the last two decades have been repelled:

  • Not one core bank service has been disintermediated.
  • Not one core bank service has been replaced.
  • Not one new competitor has taken anything out of the banking system.
  • They’ve just added to it.
  • Virgin and Tesco process their products on bank partner system.
  • PayPal sits on top of the banking network.
  • Bill Gates and others have talked about but failed to change the fundamentals, mainly because the community they serve are the banks.

Summary: no firm and no individual will fundamentally change the core of banking because it is built upon licences, infrastructures, agreements, global policies, governmental forces, regulatory management and more ensuring that the status quo is maintained.

In fact, the UK’s Office of Fair Trading (OFT) came out with a view this week that there are significant barriers to entry to new competition in banking.

They think it will change things … but it won’t.

Wanna know why?

Well I remember a major reform to encourage competition in banking that was launched in 1997.

It was called the Wallis Financial Reform Inquiry, and changed the rules of banking in Australia to encourage new competitors and break the stranglehold of the “Four Pillars”. The Four Pillars were the big four banks in Australia at the time: ANZ, Commonwealth, National Australian Bank (NAB) and Westpac.

Obviously, this reform worked well as, thirteen years later, the biggest banks in Australia are, urmmm, ANZ, Commonwealth, NAB and Westpac. In fact, their stranglehold is greater as midsize banks, such as St George, got swallowed by Westpac and BankWest by Commonwealth.

This story is true of many other countries. For example, the UK had a Big Five bank group ten years ago: Barclays, HBOS, HSBC, Lloyds and RBS; today, we still have a Big Five: Barclays, HSBC, Lloyds, RBS and Santander, with Lloyds becoming the biggest with a third of all retail banking activity trading through their doors.

So, even with reform, it is unlikely to result in reform of the oil of financial refining and drilling as any radical changes to that system creates systemic instability.

So the real focus of our debate should be the vehicles that run on the oil of finance.

Then it gets interesting.

This is when we can really get into talking about apps and widgets, plugins and extensions.

Instead of trying to change the fuel, we start to think about to use the fuel to enrich and entertain, engage and experience.

In other words, when we talk about social currency and the issues of banking, I think we focus upon the wrong things. We should be talking about the layers on top.

Things like Facebook credits are here; PayPal is here; BillShrink and Blippy are here; Strands is here; Zopa is here; all the things in Finovate are here … and more.

Things like Flattr:

… which is referenced as social currency, although it’s not really as it starts and ends with the oil: banks and money. Instead, like Blippy, it is adding richness to the oil refinery system.

Meanwhile, things like Giftflow:

… is a truly social currency, as it sits outside this system and is a pureplay community currency.

And there is a difference.

Community currencies were well defined yesterday, but one thing I missed out is Bernard Lietaer’s excellent discussion of what community actually means.

From Bernard’s book:

“The etymology of the word 'community' could have provided even more explicit information about the link, without all that hard field work by anthropologists. 'Community' derives from the two Latin roots: cum meaning together, among each other, and munis, meaning the gift, or the corresponding verb munere, to give. Hence 'community' = 'to give to each other’.”

This goes back to why I keep saying that these are separate areas: commercial and community, as gifting does not assist in increasing wealth.

In fact, it is the core divide between Islamic and Christian faiths, as Islam promotes almsgiving and is anti-usury (interest), whilst Christianity has actively changed to encourage the seeking of material wealth by the individual at the expense of community.

You may say that’s extreme but I am struck by the extreme between Bahrain, for example, and Las Vegas.

You may say “poor choice” but for two years running I went to conferences back-to-back in both cities and one is full of virtue and decency whilst the other is full of vice and indecency.

Obviously, you can decide which.

For more on this area, you can also checkout the Gresham College speech I gave on this subject last year.

The bottom-line is that as we talk about the weaknesses and failures of the banking system, we are missing the point. The banking system is protected and will take decades to change, because it is like oil refining. That is why none of the services at the core heart of the banking industry: the deposit account, the checking account, the money transmission have opened up to real competition over the years.

Even with the mobile and wireless internet.

It will … but that is like changing the oil industry.

First you have to find an alternative to oil, then you have to convert everyone off their old vehicles to the new fuel-based alternative. More on that tomorrow.

Meanwhile, there is plenty of scope to add functionality and enrichment to the core of banking.

These add-ons are far easier, and will allow social currencies to be built that suit our 21st century world of being more connected and interconnected … and there are many products that are doing just that.

So should the focus be on building better tools upon the base of banking, rather than trying to replace the base?

Is it better to build more efficient vehicles that run on oil, rather than trying to get rid of oil?

This article links to four others this week, in a series challenging the future of banking.  The series of articles are as follows:

  1. Why banks and socials agree to disagree
  2. Where banks and socials can agree
  3. If banks are like oil, build better vehicles
  4. So is there a chance of getting rid of banks?
  5. Can banks be trusted?


Note 1

From Business Week, October 31st 1994:

William H. Gates III, multibillionaire chairman of Microsoft Corp., wants to manage your money. He also wants to process your checks and pay your bills, perhaps even arrange a loan.

To get there, Gates on Oct. 13 announced plans to pay a staggering $1.5 billion–a 40% premium–for Intuit Inc., the maker of the best-selling Quicken personal-finance software. If the deal passes regulatory muster, Microsoft would instantly land the top spot in that tiny but fast-growing market. More important, Gates sees Intuit, coupled with an on-line service Microsoft is creating nicknamed Marvel, as a springboard for building a vast electronic marketplace for home-based financial transactions. Banking is just one piece. Eventually, Microsoft hopes to offer everything from mutual funds to brokerage services over its network.

The prospect has many banks spooked. For years, they have dabbled, mostly unsuccessfully, with remote banking. Now, Microsoft and Intuit have sent a jarring message: Get wired or get left behind. "If banks don't heed this wake-up call, they won't need another one," says William Randle, senior vice- president of Huntington Bancshares.


Microsoft and Intuit insist they want to work with banks–not shut them out. "We have no interest in being a bank," says Scott Cook, chairman of Intuit who, upon completion of the deal, will become Microsoft's electronic-commerce czar. But many bankers view Intuit's purchase last July of National Payment Clearinghouse Inc., an electronic bill-processor, as an encroachment on their territory. And Gates has made no secret of his view that banks are "dinosaurs."


Note 2

From Marketing Week, April 19th 1996:

Supermarket giant Tesco is taking on the might of the high street banks by launching an "own-label" deposit account and credit card via its Clubcard scheme … a Tesco source says that the scheme is only the first of many planned by the supermarket. "Tesco has watched the banks and thinks that most are a bunch of clowns," he says."Tesco can do a much better job. It has a much stronger customer base than the banks and could offer better services."


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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  • Chris, I bet you didn’t realize where this was going to go when you decided to support Venessa’s actions. Nor did I. But this rocks, in a way. That aside, a few concepts that held my attention here.
    Better fossil fuel vehicles are good, but remain a transition technology, with electric vehicles up and running in a few years. I would appreciate if the same industry built them, because of their experience with road holding and other safety features. Yet, the industry is plagued by lobbying and less newsworthy maneuvering for favorable regulation, and other skulduggery. “Car Wars” by Jonathan Mantle is an entertaining read about what’s molding in the closets of the brands we all know. What makes us think regulated ____ are any different? (Name a cartel of your choice.)
    “why I keep saying that these are separate areas: commercial and community, as gifting does not assist in increasing wealth.” Yes, if your yardstick is goods, services, or their latent form, currency. No if you teach a man to fish, or share other investments of time, attention, and other immaterial currency.
    Agreeing with the innovate approach – the banks are best left regulated to stay focused on what they understand pretty well and can (usually) be trusted with, material wealth. They offer a commodity service that a majority of people do not wish to build relations with. Banking is not sexy, and that is good. If it was, it would set off a lot of red lights in the trust department.
    All clear, I take my attention elsewhere.

  • Not sure what happened but my last post disappeared! I’ll try again.
    Chris great post, you are definitely ensuring the door remains open.
    I largely agree with your comments apart from the following:-
    “So, even with reform, it is unlikely to result in reform of the oil of financial refining and drilling as any radical changes to that system creates systemic instability”
    The engines of the financial systems are largely legacy back office systems which have been neglected for years, and tinkered with only when necessary. Whilst I doubt that the lethargy to refresh these ‘webs of tangled spaghetti’ will disappear overnight, disappear I believe they will. The technology to achieve this already exists, however a reduction in the Total Operating Costs has not initiated this change.
    However the day approaches when this will be done. Will it be a result of the success of new banks, such as Bank Simple attracting enough deposits to produce a tipping point and the resultant mad scramble from the incumbents to sort out the back office? Or will it be as a result of one of the incumbents, or even a group of them deciding enough is enough? Only time will tell, I know where my money is!

  • funny that CoCreatr honed in on the same phrase that i did –
    “gifting does not assist in increasing wealth”
    i argue that it most certainly does, depending on how wide one would choose to expand their definition of wealth.
    but this is where i have very much enjoyed your clarifications of what the banking industry is and is for. it is rather cut and dry, dealing with infrastructure, trade, material things.
    we need those things. we need buildings and roads and marketplaces. but i believe there is a peak to materiality before it starts devolving into something damaging for mind/species/planet. our current models reward growth for growth’s sake, mindless hyperconsumption, planned obsolescence.
    i don’t know that these things are necessarily healthy or sane.
    (it’s what IS, but that doesn’t make it favorable or optimal.)
    i’m interested in seeing what would happen if we redefine wealth to be inclusive of the strengthening and preservation of systems, not based on waste and scarcity. then create currencies that facilitate the building of that kind of wealth. that would be disruptive.

  • “First, a key question: if banks are oil, how can you build better vehicles?
    I think we’ve been arguing the wrong point when we attack the banking system per se, as the core of banking – the bit that it really exists for – is to oil global trade, as opined by Stephen Hester, CEO of RBS.”
    There is a theme in the last few of your posts, to remove the banks from the argument, that banking (as defined) exists a priori and we are just talking about what we will bank. While I understand this position based on your client base, it is still a position and not a fact or even a good assumption. Banking is a fiat system, someone declared it into being, then called it Good.
    Value exchange and stores of value existed long before the invention of banking. They will exist long after banking is no longer required.
    Bastiat (sp?) declared that private property continually destroys itself, becoming transformed into communal wealth, that we focus on solving our own ages problems with private enterprise but inherit the labors of our predecessors as public good. I think this is the route ‘banking’ will take.
    While Venessa is laudably positive and bridge building in her message; I would like to be less so. If banks are oil and someone invents DIY cold fusion, do we need banks anymore (sorry to abuse the metaphor)? Only if we decide that by definition we need banks, then redefine the bank to continue their privileged position (this is actually the future I expect). I think your previous comment about banks moving from money to data (or whatever needs to be exchanged securely), speaks of this future.
    From a business model perspective, you are quite right to work with your client to redefine their business more broadly, so that they can survive the transition. This is similar to many successful transitions in the past where businesses say, we aren’t a car company, we’re in the transportation business, or we aren’t a paper company, we’re in the document business then proceed to imagine their future without clinging to their past. This is most definitely the way forward for banks that will survive. The real question is, do we still call them banks. Being change averse and traditional, we may well do so, but only if the banks successfully navigate the transition. If they cling too long to old modes, the new ‘bank’ will be called something else.
    So what has changed that we no longer need banks (or phrased differently, prove to the audience you are not some granola eating, pot smoking, peacenik, hemp wearing, communist, tax and spend liberal socialist). The ability to mediate every interaction with a ubiquitous, persistent, computable layer of information. We “can” now track every generation and exchange of value and do not need a trusted anonymous fiat currency to store or exchange value.
    Of course declaring the old system broken does not will it out of existence. I think Shirkey made the point in his book ‘Here Comes Everybody’ that just because the old system is broken and people know it, doesn’t mean that we have any idea what the new system looks like (speaking of newspapers). Here follows a long period of experimentation and I think the future will be something none of us thought of at all. That doesn’t excuse us from thinking about it.
    Thanks to all who Participate and Contribute for the value they are donating, may it come back to them.

  • To paraphrase Keynes: the banking system can survive longer than the anti-bank activist can remain solvent.
    Thanks Chris for keeping the discussion going.

  • Better vehicles, certainly. And better production methods.
    Just as we expect oil companies to behave when drilling for oil (in the Gulf of Mexico, in Nigeria), we expect banks to behave when trading risk and duration (sub-prime investments, Icelandic deposit interest rates).
    We expect oil companies to help build more efficient engines through closer integration of their product development with the r&d dept of motor engineers, not to just promote the lowest MPG V12s. We expect banks to develop better use of risk differences, not to just look for maximisation of risk at the expense of regulating governments.
    Maybe it is not the banking system we want to get rid off, maybe it is the execution that is one step behind the strategic execution and transparency of the oil companies (which, by the way, is behind many other industries simply because of its protected nature).
    Maybe we expect the banks to improve their oligopoly-protected management. Ever seen a picture of excessive risk? Theirs being a non-physical product, banks’ mismanagement of their processes is less visible on a daily basis; it doesn’t make the headlines at an early stage, as it does in the oil industry.
    If I understood it right, Venessa’s rant the other day was not so much anti-banking system as it was anti-banks’ execution. A new currency in my view is still a currency. Wider-defined wealth is still wealth. There will always be the need for institutions that assume variations in risk and duration, whether expressed in the one currency or the other. New currencies may change the payment infrastructure, they will not change the nature of the core balance sheet of commercial banks.
    Demanding transparency of production methods (Triodos!) could be a great consumer angle.

  • From a purely practical perspective, I’d like to connect with a few bankers who can actually impact the future Venessa and others envision. Specifically, I’m looking for a bank’s Global Relations Manager for SWIFT, as well as someone from their government / institutional relations staff. We’re working to improve the efficiency and integrity of the current process for verifying funding sources of prospective students and scholars around the world, in compliance with the host country’s visa regulations.
    This discussion is valuable, certainly, but I’d like to get to work on the transition, one particular niche at a time.

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