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You may be innovative today, but tomorrow you’re just an incumbent

I’m going to give up on the discussions about banks dragging heels when it comes to the global net soon, but only after a few more pieces of debate.

Today, it’s all about innovation.

Innovation eventually is absorbed into the mainstream and becomes the incumbent.

  • Yahoo! was disruptive until Google appeared;
  • Google was disruptive until Facebook appeared;
  • Facebook was disruptive until Snapchat appeared; and
  • Snapchat is disruptive until something else appears.

The same is true in payments.

  • PayPal was disruptive until Square appeared;
  • Square was disruptive until Bitcoin appeared;
  • Bitcoin was disruptive until Ripple appeared; and
  • Ripple is disruptive until something else appears.

So the innovator becomes the mainstream and, in banking, as it becomes mainstream it is absorbed into the regulatory regime.

A colleague said to me this week that “the banks are constipated with compliance”.

Not the nicest way of putting things, but it makes the point.

Whilst we are grappling with regulation and compliance, the disruptors and innovators can shake the tree.

But as they shake the tree, they eventually become part of it.

Take Bitcoin.

You have this virtual money created by Satoshi Nakamoto, the first effective cryptocurrency in the world.  Then you have a virtual exchange to trade the virtual money. 

Then you have a virtual thief who steals the virtual money from the virtual exchange. 

The only thing is that this is not virtual money but real money to those who have lost it.

At that point, the losers look to the system to rectify their losses.

This is the point I made a while ago when Second Life went through a similar bubble and burst.

When the Second Life banks went bust, the Second Life ecosystem dictated that the banks in the virtual world must hold licences as banks in the real world in order to protect the assets.

That is what will happen with Bitcoin and all else.

They may innovate and create a new ecosystem, but the ecosystem does not work without fail-safes and insurances to provide payback when losses occur, especially if caused by issues out of the control of those who lose.

So what will happen over time is that we will see wave upon wave of innovation with new technologies.

Just as we claimed twenty years ago, there will be many banks who are slow to react and innovate but, given time, the innovative new disruptors and their business models will be acquired and integrated into the mainstream or, like PayPal, will live happily alongside the mainstream.

That’s just the way the cookie crumbles.

From The Finanser, December 2008: 

Second Life's popularity disappeared when their banking system collapsed in summer 2007.  The banking collapse was a reaction to Second Life being forced to close down gambling facilities in their virtual world in July 2007.

Until then, the website had been a phenomenon, growing from virtually no users to over 10 million in a year. This was incredible, and everyone felt it demonstrated the new emergence of business models.

In particular, the fact that Second Life allowed real commerce to be transacted by converting real US dollars to virtual dollars, meant that everyone started to test commerce in virtual worlds through the service. For example, several banks invested in major projects in Second Life, including ING, Wells Fargo, SAXO Bank and Deutsche Bank.

However, several banks also operated in Second Life that were managed by guys in their bedrooms. These included banks such as Ginko Bank, run by a Brazilian chap at home.

The trouble Ginko Bank experienced started when internet gambling was forced to close under US Laws.  The management of Second Life decided that they also had to close access to gambling in virtual worlds in July 2007 to comply with this policy, which led to a major run on the virtual banks.

Until this date, a lot of the commercial transactions taking place in Second Life, where people converted real US dollars to Linden dollars, were for gambling purposes apparently. Therefore, the closure of gambling denizens in the virtual world meant that folks immediately started to take money out of the virtual banks, a bit like Northern Rock but worse.

So imagine you are Andre Sanchez in Sao Paulo, the one-man band behind the virtual Ginko Bank.

You have over a million real US dollars on account, translated into around 275 million Linden Dollars that you are managing for the Second Life community.

Suddenly, your customers demand their money be converted back to real dollars, and you drown in their demands so you just close down the virtual bank, leaving punters with losses of around $750,000 in real life.

This led to calls for compensation from Linden Labs, who operate Second Life, but they said it wasn’t their job to regulate the banks.

Oh dear.

Result: Second Life’s popularity collapsed and, in a desperate move to rebuild trust, they said that only real life banks with real world banking licences can now operate virtual banks.

Talk about virtual life mirroring real life. 



This is Part Four of a six-part series on being a Digital Bank:

Part One: Major parts of banking are stuck in the last century

During my lifetime, two things have fundamentally changed the world: travel and technology.

Part Two: Heidi Miller, Bitcoin and fitness for purpose

Building on yesterday’s theme about how a cheque from Canada has taken six weeks to process and had significant processing charges taken from the deposit as a result, reminds me of Heidi Miller’s speech from SIBOS 2004, which is still talked about today.  What did Heidi say that was so compelling?

Part Three: We are not Borg, we are Human and dancing to a different tune

Building to the theme of the divide between the old world of finance and the new, and why (some) banks aren't fit for the 21st century, brings a few more points to mind, in particular about control and centralisation.  Banks were built as control freaks.  They need to own the complete end-to-end cycle of everything.  They have to develop their own software, systems and services, which is why they end up with more developers than Microsoft as a result.

Part Four: You may be innovative today, but tomorrow you're just an incumbent

I’m going to give up on the discussions about banks dragging heels when it comes to the global net soon, but only after a few more pieces of debate.  Today, it’s all about innovation.

Part Five: Please refer to the Digital Department

I have this cheesy line in my presentation about digital is a journey, not a destination.  The destination comment is that most senior bank management think it’s a one-off project, like building a pyramid or a cathedral. You make the investment and it’s done.  That’s not the case.

Part Six: Banking-as-a-Service, five years later

In a final note on the Digital Bank Transformation, I return to a theme I’ve explored a few times (from Banking-as-a-Service to APIs and apps). The core of the model of banking is represented in various ways, but I encapsulate it as three companies in one: a retailer that has customer intimacy; a processor that has operational excellence; and a manufacturer of products.


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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