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Why Facebook will not become a bank

Everyone's talking about Facebook becoming a bank in the future, but I don't believe it will happen.  

Here's why …

Just had a long discussion with a bunch of banks about potential disruptions to banking based upon mobile carriers upscaling and innovating, the launch of NFC payments via Android and iPhone, the possibilities of Google and Apple and brethren, and the likelihood of a Facebook Bank in the near future.

One of the bank folks asked: “who would control the infrastructure if they did these things? We would.”

The point being that all innovations in banking such as PayPal have been on the old bank plumbing in the past and it will be in the future.

I agree to an extent.

Banks are regulated and need licences and this is a key feature of the system from a governmental perspective in making them work.

It is the reason why Linden Labs’ Second Life had to regulate their banks in the virtual world with bank licences in the real world, and why QQ is being regulated by the People’s Republic of China.

But this maybe ignores a basic tenet of the internet: freedom.

So as we move into the melding of online and offline into real-time, we could see a major shift away from bank infrastructures such as Visa, MasterCard and SWIFT into new infrastructures provided by PayPal and even Facebook.

Now everyone’s getting excited about Facebook becoming a bank because of Facebook credits and the whole thing about virtual exchange of goods and services.

Even I’ve been getting that bug a bit.

And yes, it does get interesting if you think of a crowdsourced bank.

Could it happen?

Possibly.

But I don’t think Apple, Google, Facebook or Amazon will create such a thing.

The reason is that core transaction servicing of consumer accounts is not of that much interest.

It’s basic plumbing and you don’t make that much money out of plumbing.

Or, to put it another way, it’s train tracks.

And this is how our conversation ended.

Banks have traditionally run the trains for most countries.

They have owned the trains, the stations, the signal boxes, the tracks … everything,.

They’ve then been able to price their service as they wanted, as there was no competition over transport services.

Gradually governments deregulated and allowed companies to take over the stations and the trains, leaving the banks to look after the train tracks as that’s a safety concern and is just a utility

This is how banking is developing.

Banks have lost a lot of the interesting stuff – client servicing of high margin products from cards to pensions to savings to loans – and are left with the train tracks – transaction processing of core deposits and withdrawals.

Does anyone want the tracks?

Not really.

So will the new disruptors in the form of mobile firms, Google, Apple and company just go for the stations and trains or the tracks?

Banks think just the former and not the latter.

My only comment back is that I don’t think the disruptors will go for the tracks – core transaction processing – except for the mobile firms who are performing transaction processing in emerging economies and will upscale over time.

However, there is a more significant threat to bank services than even this.

And that threat is the crowdsourced bank.

The crowdsourced bank would be like a Zyngbank.

Zyngbank is based upon the gaming firm Zynga, who recently gained 100 million users of Cityville in just six weeks.

If a gaming firm can get 100 million players in just six weeks, what would happen if we could seriously launch a debit and credit management system in Facebook from a credible source.

An app that was trusted by Facebook users.

What would happen is that you’d have a service as big as PayPal emerge within weeks that was global, unregulated and outside the banking system completely.

Now that really could be scary.

 

p.s. apologies for the mixed metaphors of plumbing and trains in this blog entry and the counterargument of going for the train tracks versus not going for the train tracks … it’s just a recollection of how our dialogue went and I thought the logic flow was best to be maintained rather than making this just pretty for the purposes of the write-up …

 

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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  • Interessant artikel over de ontwikkelingen van het bankwezen. http://thefinanser.co.uk/fsclub/2011/05/zyngbank-the-crowdsourced-bank.html

  • Very interesting post.
    I am investing in a start up person to person lending marketplace right now and we have been looking into how to process payments without the banks and no matter which direction I turn, the infrastructure is built upon the banks.
    I believe the client facing stuff is going to be taken over step-by-step by non banks, but as you mentioned the train tracks will always be the banks as they also multiply money and create money for the economy.
    But what if that were reformed?
    I would love to hear peoples ideas on payment systems and infrastructure of payments in a peer to peer environment that can work with minimal bank involvement.
    Great post.
    Simon Dixon
    P.S. I wrote a blog on how this might pan out:
    http://www.simondixon.org/peer-to-peer-lending-will-it-replace-banking/2011/03/27/

  • Interesting points you made. But banking is not restricted to payments and transactions. Even these things might be interesting with new cost structures. But there are much more alternative services facebook, google or even apple could provide when having a banking license or when partnering with a bank.
    So far I am not convinced that there will not be surprises in the near future.
    Kind regards
    Hansjörg
    http://www.der-bank-blog.de

  • Gidi Dorevitch

    Facebook does not have to “become” a bank, when they may be able to simply BUY an existing mid-level bank, use it’s infrastructure, and re-shape it according to their needs… That could be interesting, don’t you think?

  • Chris Skinner

    Hi folks
    I guess I’m saying that Facebook will be a “player” in the financial world, particularly as Facebook credits could create a transaction system outside the banking network.
    However, Facebook becoming a bank is not necessary. Buying a bank is not necessary.
    Why would they want to do it?
    And I guess I hark back to 1995 when everyone thought Microsoft would become a bank.
    Just because tech is so key to banking doesn’t mean that the tech provider has to become or buy a bank.
    Chris