Home / Digital Bank / I didn’t say that banks are “too big to be disrupted” but “too regulated to be disrupted”

I didn’t say that banks are “too big to be disrupted” but “too regulated to be disrupted”

Quite often, with attribution, I let other websites cut and paste this blog onto their own.  American Banker did that recently but changed the title of the blog from  The reports of my bank's death are greatly exaggerated to Like Airlines and Pharma, Banking’s Too Big to Disrupt*.  In so doing, the intent of the original became slightly distorted and has led to some interesting responses.   For example, JP Nicols responded with Banks better watch out for geeks in the garage and Brett King noted that Pharma is being disrupted as much as banking.

As I stated in the original piece, it stemmed from a debate on twitter between Brett and Michal Panowicz (summarised here by Jim Marous) and, as a result of the slight distortion of my original message, I need to reiterate exactly the point I am making.

First, banking is not being disrupted. 


It is being evolved.  I have made this point before, and stated that the evolution is in the architecture of banking to be a core digital play rather than a physical one.  Like books, music, entertainment, travel agents and more, banking is something that can be done through devices with no physical need for service.  You cannot have that in airlines (you need to physically travel) or gas stations (you need to put gas in your engine physically) but you can have some services, like banking and music and travel orders, made through a pure digital play.

However, unlike music, books and travel agents, banking will not be wiped out by a new player creating a new way of doing things.  There will be no iTunes, Uber, Amazon or Expedia of banking.  The reason for this is that, unlike all those other lines of business, banking is regulated.  Banking is integrated with government policy; is a political instrument; is used as the government’s control mechanism for social order; and is core to a country’s economic success or failure.  For this reason, it is in government’s interest to licence value stores and value exchanges.  This controls monetary supply and economic stability.  For this reason, banks are given the luxury of time to adapt that book stores, travel agents and music shops didn’t have.

Equally, we get a lot of folks saying that a new giant will emerge from the Fintech community to displace banks.  There will be a new JPMorgan or HSBC, which might be an Apple or Kabbage.

I don’t think so. First the P2P community are being given securitised funds from the banking community, so banks win whether they do the lending or the crowdfunders do it for them.  In fact, it cuts costs and displaces risk to the P2P platform, so it’s more efficient in many ways.  A win:win for the banks in other words.

Cryptocurrencies have proven they can’t be trusted – Mt.Gox, Bitstamp, the Bitcoin Foundation – and so the technology is moving from the Wild West of the Web to the Ripples of the banking fraternity.  Again, from chaos comes control, and banks keep their status of being transactors and stores of value.

Mobile will take banking to the masses and the millions of unbanked.  Yes, what’s interesting then is that the unbanked become banked because they build mobile money credit histories that can be trusted.  When M-PESA launched in Kenya in 2007, there were only 2.5 million adults with bank accounts; eight years later, over 15 million Kenyans have bank accounts, thanks to mobile credit histories.  The banks win again.

Meanwhile, as all this so called disruption is happening, the banks can live with the threats and opportunities therein because they know they have time to evolve due to their regulatory requirements.  As Transferwise and Holvi bathe in the misguided belief that the regulator doesn’t care about them, there will come a day when they do.  Come that day, the Transferwise’s and Holvi’s will either be acquired, merged or moved into the banking control ecosystem or shut down.  Full stop.

The only other industry that works this way is probably pharma, where inventing the next big drug product is the focus. That is because the pharma industry works on having patents, just as banks work as an industry based upon licences.

Without patents or licences, what have you got?  A sexy front end distribution system or app that sits like a cherry on a cake.  Very pretty, but changes nothing in the core ingredients of the system.

Nice try y’all.

Meantime, I am not saying that banks will not need to change.  They crucially must adapt to survive.  Their survival being determined by how quickly they can step up to the new model challenge of being digital and not physical.  The ones who work out their digital core architecture, infrastructure and organisational evolution strategy (along their branch closure and staff redeployment strategy) first will be the ones that will lead the rapid change from physical to digital.  The ones who wait will either be beaten by competitive forces or a shadow of their former selves.  Meantime, the ones who create new models through Fintech, will be the ones funded and also acquired by the early digital leaders of the traditional system.  Either way, they all get evolved into the new model army of the digital financial market and, give it ten years, I fundamentally believe the that biggest banks in the world will still be in the list of the biggest and that there will not be one new name in that list, other than an existing bank we haven’t seen arise yet (maybe an African one for example).  It’ll be a bank that create an Uber-style version of their banking offer maybe, but it won’t be an Uber of banking.

Thoughts?

 

* someone mentioned that my original title seemed remarkably English which is why the American Banker switched it to something more snazzy.  For the record, the original title is a play on the American author Mark Twain's comment: “The report of my death was an exaggeration”

 

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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3 comments

  1. Interesting. I read somewhere 80% of lending club (or one of the SME lending start-ups) liquidity actually comes from banks. What they’ve actually built is a more usable front end for corporate banking services. The real risk is being commoditised and eroding margins, with high underlying costs.
    Banks are therefore, rightly afraid of being commoditised. It’s already happening to a degree. Fintech players are taking the UI and the customer relationship. In addition banks are structured with checks and balances that don’t allow ideas like APIs and Big Data to become reality. For a couple of reasons
    1) Most stakeholders don’t get the business value of these ideas and kill what looks like risk, rather than embrace what they can’t see is opportunity (Innovation looks a lot like risk when you wear compliance goggles)
    2)The systems banks use are old, don’t talk to each other and often don’t have the ability to simply have an API published, or pull out metadata for sharing with clients.
    Banking is a black hole of batch processes, not only to corporates and consumers, but to bank staff too.
    The disruption threat comes from new core banking platforms like Fidor OS, and some others that are now popping up in emerging markets. The idea of a “bank in the cloud” is now possible, even though your risk teams will swear blind it isn’t.
    It’s not technically compatible with current regulation, or your current infrastructure… So what we will see is these bank in the cloud / wallet based solutions grow outside of the traditional banking markets and slowly get adopted / acquired by banks in a 3 – 5 year time frame.
    Don’t believe me? Have a good look under the hood of what Alibaba has…
    A wallet / payments capability
    A merchant / e-commerce play
    Credit scoring capability
    Lending and “deposits” by any other name…
    and 800M users
    Banks are stuck in the 1990s mindset of trying to “Own” the customer, and need to get really humble, really fast. Have a sexy back end and scale like crazy OR, create the consumer brand everyone wants to use.
    As Chris says in another post, focussing on mobile being being too shit scared to touch the back end HASN’T worked. Cap Gemini agree.
    Could have told you that 5 years ago but lets try again.
    What do we want? APIs! When we do we want them? NOW!

  2. This guy vastly underestimates tech. Wow. “Bitcoin can’t be trusted.” Holy smokes. Well, there were those who said the Internet would not amount to much in it’s infant years.

  3. Wrong Tom
    I understand Fintech better than most. I therefore suggest you read other blog entries and make a more constructive comment. This comment is crap as yes, bitcoin can’t be trusted when many, including me, are losing $1000s with flaky exchanges and a bankrupt Foundation.
    Chris

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