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Banks only survive because of regulations

We recently celebrated the two hundredth birthday of Charles Darwin. 

Darwin, the man who broke
through the prejudiced views of the religious world of the Victorian era by
being brave enough to say we were descended from apes and not created by God.


That is a debate that still rages even today, and it is clear that Darwin’s views of the 
world has shaped much of the outlook we have today.

For example, in business we often cite the fact that only
the fittest survive.

Darwin never actually said that it is the survival of the
fittest however.

We think he said something like: “It is not the strongest of
the species that survives, nor the most intelligent, but rather the one most
adaptable to change.”

He didn’t say that either (this was a summary of his thesis by Leon C. Megginson, a management sociologist at Louisiana State

Darwin’s actual words, if you’re interested, were:

“Owing to this
struggle for life, any variation, however slight and from whatever cause
proceeding, if it be in any degree profitable to an individual of any species,
in its infinitely complex relationship to other organic beings and to external
nature, will tend to the preservation of that individual, and will generally be
inherited by its offspring. The offspring, also, will thus have a better chance
of surviving, for, of the many individuals of any species which are
periodically born, but a small number can survive. I have called this
principle, by which each slight variation, if useful, is preserved, by the term
Natural Selection, in order to mark its relation to man's power of selection.”

I think I prefer Megginson’s summary.

The most adaptable to change.

That is the key.

And, in banking, this is a mantra that I have seen and heard
for many years: we are adaptable to change. 
We are fast followers.  We do not
need to innovate and lead.  We just need
to be at the forefront of change as it occurs.

This is the way most banks behave and perhaps, based upon
Darwinism, is the key to why many banks are centuries old.

Or is that banks do not need to change because of the
barriers to entry?

The barriers to entry include high capital ratios based upon
deposit holders, regular and detailed regulatory and compliance checks, and a
market that is crowded and hard to break open.

Some would say it’s hardly worth competing in core banking,
as taking deposits means that you need to hold thousands of dollars in
safeholding for each deposit holder, and then you get an account that hardly
makes any profit anyway.

Maybe so, but there are those adapting to change like Simple
and Movenbank, Zopa and Kickstarter, SmartyPig and Funding Circle and more, all
creating new models of finance and, for some like Fidor Bank, new banks.

This still does not mean that traditional banks need to
innovate or lead, but it does challenge their adaptability to change.

As mentioned, banks believe they are fast followers of
change when required and, if there is any big change in the market they cannot
respond to, they would acquire.

If you fundamentally challenged a bank’s operation, you
would be killed or eaten in other words.

That’s the survival of the fittest view of the world.

But, in today’s world of fast cycle change – it took Zynga
only 43 days to get 100 million people playing Cityville compared to 38 years
to get 50 million to listen to radio – is the eaten or kill view sustainable?

If you have a challenger who is fast adapting to the changing
world and you are unable to fast change, can you survive?

If the challenger is adapting and doesn’t want to be acquired,
are you truly fit enough to kill the challenger?

That would mean, in banking market terms, that you would
need to offer a comparable or better offer than the challenger and be as or
more trusted than the upstart.

Offering a comparable or better service than a new entrant
would be hard, as the new entrant would be built upon a platform perfect for
the present whilst the bank would have to adapt their platform build for the

That is why banks have consistently failed to do this in the
past and is why call centres, internet and mobile are adjuncts to branch operations.

It is also becoming a much greater issue due to technology.

Banks are data businesses but, as we go through waves of
technology change, they are becoming less and less fit, and less and less adaptable
to change.

That is clearly the case today as made clear in this BBC
News report
 which can be summarised as banks put sticking plaster on systems in order to
keep functioning, but are building up a bigger and bigger debt based upon their
inability to change.

Equally, if banks are unable to change, then their only
other survival strategy would be based upon being more trusted than the

Well, that’s clearly not the case today either.

So banks would be unable to compete with a fast cycle change
in the market where a challenger grew in core operations.  This means that the only thing that keeps traditional
banking models sustainable are the barriers to entry, namely the regulations.

Or am I missing something? 

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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  1. Darwin did not say that we were descended from apes. He said that man and apes had a common ancestor.
    The Cityville / radio analogy falls down because Cityville is a game among many running on an established network infrastructure, the internet, with billions of people already having computers. Radio was a new technology requiring the building of a transmission system and the purchase of receivers by millions of listeners. The correct analogy might have been the number of people listening to The Archers once this was done.
    But I agree with your general thesis in the article.

  2. On “fast following,” the technical term of art in economics is “herding”. This indicates an industry that operates together, and any change that happens sweeps through at the same pace for each incumbent. In this sense, “fast following” means following each other as fast as the herd moves.
    Herding is generally seen as a strong signal that the industry is driven by regulation, and/or/thusly is commodity product. An alternate unregulated industry displays significant differences between competitors; look at Apple v. Microsoft v. Google v. Amazon v. Oracle. The differences are easy to discern by ordinary people.

  3. For an alternate (Darwinian?) treatment on the evolution of banking, see Kevin Dowd’s superlative introduction:

  4. Good points Jeremy
    Re Darwin: agreed. We weren’t descended from an ape, but share the same common family tree as these wonderful creatures. Having said that, I am often accused of being a cheeky monkey!
    Re radio: this sparks a completely new drift of conversation around building versus leveraging infrastructure.
    The different today is that the internet backbone, built over three decades too, allows programming (Zynga) and players (tablets and smartphones) to do far more with the network than our old analogue infrastructures.
    This really means that media can now change overnight, when the old way would have meant building a new infrastructure for every form of media.
    To illustrate: we can launch a whole new integrated multimedia world of experiences and get 100 million engaged customers overnight. In the days of radio, we would have had to build an infrastructure for each and every new media form, and wait decades to get adoption.
    That is the real difference today.

  5. Thanks Iang / Kevin

  6. Completely agree and I would like to add that some of the traditional functions of a bank are likely to be taken over by non-banks in the near future. Consider the range from e-payments to crowd-funding and the traditional banking model seems fundamentally unfit for the future.

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