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Too Big To Fail or Too Small To Succeed

We talk all the time about too big to fail, alternatively known as TBTF or 2B2F, but is there another side to this equation of the GFS (Global Financial Crisis) which could be called TSTS or 2S2S?

TSTS is too small to succeed, and it strikes me that the financial industry has squeezed out almost all new players in the markets over the years.  They’ve either been squeezed out or acquired that is.

There are exceptions to this rule.

PayPal and Alipay in the online payments space; Chi-X/Instinet in the equities arena; the EBA in the ACH markets; and a few others.

Each of the above succeeded because there was either a space unfilled by the banks, as is also evidenced by the success of other ventures such as M-PESA in mobile remittances, or due to regulatory change opening new opportunities for existing players, such as Chi-X thanks to MiFID and EBA’s STEP2 thanks to the PSD.

But a totally new attack on a core existing financial market is rare, and rarely succeeds.

When the internet banking first generation markets arrived, I remember the adventures and disappointments of new banks such as the Gay and Lesbian (G&L) Bank in America and Bowie Bank.  These were great ideas but flawed as the markets weren’t ready, or maybe the customers weren’t ready to come out.

Even major players who have tried to leverage cracks in the bank system have failed, as referenced so many times when we look at the plays by Wal*Mart, Tesco and Virgin.

With all of these knocks on the door of the banking system, each barbarian at the gate finds the same thing: they’re too small to succeed.

The banks by their very nature are large and collegiate, and this si why the government, regulators and others are finding it so hard to create new competition in banking.

Now there is new competition in banking – just look at Banksimple and Movenbank as illustrations – but can they succeed or will they all suffer the TSTS syndrome?

Will they be another G&L Bank or the next PayPal?

The answer will be seen by the paths they take, and the key is to target a space where banks are not looking.

G&L failed because banks were looking at internet banking. 

Therefore a first mover could gain some traction, but it could be stifled and quelled quite easily by the incumbents because they could copy and overwhelm it fast.

PayPal succeeded because the banks weren’t looking in that direction.

They thought online, small payments were irrelevant.

By the time it was relevant, the banks had missed the boat.

That’s what new competitors must do if they are to transition from TSTS to TBTF.

Choose an area where banks aren’t looking and then change the rules a little.

I would say more but am too involved in some things that right now are TSTS to want to give away their strategies.

But I think you can see from where this blog’s intent is going that it will seem peripheral to bank services when, in fact, it is attacking the core … just that the banks don’t know this because it will only become obvious when it’s too late.

Interesting times …


Just to illustrate the point further, this interveiw with Elizabeth Warren on why she created the Consumer Protection Agency in the USA makes the point well:

After a few meetings in which she was politely rebuffed, one executive walked Warren to the door and, with his arm around her, let her in on a trade secret: If he admitted that his card’s actual rate was 17 percent, while his competitors were still claiming theirs was only 2.9 percent, his customers would desert him for the seemingly cheaper option, seal of approval or not. No credit-card company would ever go along with a clean card unless all of them did. And the only way to get all of them to do it was to require it by law.

At this point, Warren says, the banker made a confession. “We recognize that we have an unsustainable model, and it cannot work forever,” she says he told her. “If we told people how much these things cost, they wouldn’t use them.”



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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