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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 Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.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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