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Why can’t banks behave more like IT companies?

I had a really interesting discussion with a bank about the component based model that I’ve been expounding for some years.

In brief, the core of this model suggests that every piece of banking is being attacked by specialist digital firms and that banks will become assemblers of these specialist pieces, rather than providers of all of them.

Banks have historically built and deployed end-to-end banking. In a digital world they don’t need to do that anymore and, in fact, it will be unsustainable to do so. To build every piece of banking functionality internally will be too high a cost. Even if the bank does do this, the resulting outputs will be good in some parts, average in others and downright awful in a few. It is these last ones where banks need to partner and integrate, rather than build and deploy.

It is very similar to what large technology firms do, and banks are large technology firms.

SAP does not try to do everything in the technology world they live in. They couldn’t. Instead they acquire strategic parts of the business that need completion, partner with systems integrators where appropriate, along with other specialist software, hardware and infrastructure firms to deliver a complete solution. That’s what banks need to do.

Big banks will be just big technology firms that process finance (some already are). In doing this, they will partner with systems integrators, specialist software firms and other hardware and infrastructure firms that provide the best capability to process finance for their clients.

It’s the only way banks will survive in this digital age.

The issue that most banks have in thinking this way is that it is at opposites with today’s way of doing things. Today’s way of doing things works on the premise that the customer is locked in to the bank. The bank therefore focuses upon keeping the customer locked in by being opaque, hiding fees and charges by wrapping them into services.

As banking is componentised, these opaque areas will become transparent. The digital specialists will make it clear that transactions can be processed for peanuts; that a deposit account does not have to sit within one institution; that a wallet can be used for free; and that payments is easy.

These things are already coming into play thanks to specialists like PayPal and new forms of exchange such as bitcoin.

All of this therefore demands a new business model for banks as financial integrators, in the same way as technology is delivered by systems integrators.

Banks need a new mentality to deal with componentisation and transparency, as well as a new business model however, and most banks have not got the guts to think this way yet. The few who do will be the ones that will dominate the industry ten years from now.


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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  • I think the answer to the question posed in the title of your post is quite simple: Banks can’t behave more like IT companies because: 1) they’re more highly regulated, which leads to a compliance-dominated culture and mindset; 2) they have to be a whole more concerned with risk management, which inhibits IT company-like behavior; and 3) they’re not staffed predominantly by caffeine- and pizza-fueled 20-somethings.
    I’ve never seen any stats on this, but in the 15 years that I’ve been a technology analyst (or to be more precise, worked for a technology analyst firm), I’ve seen a LOT of technology firms come and go.
    Is the rate of failure worse among banks or IT firms? I don’t know. But most of the banks that have failed (in the US, at least) have done so more because of loan losses and operational issues than because they didn’t “behave like an IT company.”

  • Chris,
    Great post. I’ve been saying the same thing at boardrooms around the world. Don’t expect a start-up digital competitor who is an end-to-end bank, tackling you across the board. It’s the case of death by a thousand cuts as specialist experiences tackle products and services separately. On that basis banks won’t be able to stay competitive.
    Look at P2P lending for example. While still small in consideration of total personal lending markets in the US and UK, both Lending Club and Zopa (for example) are much better at managing default risk than banks.
    Basic checking accounts are being attacked all over the world by start-ups from Moven in the US, to Fidor in Germany, and even UBank was an early attempt at this. Pretty soon, banks won’t be able to compete and probably won’t be able to afford to compete on CASA/Checking.
    The same is happening with Wealth Management with Betterment, LearnVest, WealthFront, etc.
    It’s all chipping away based on lower friction, better value and certainly a much, much better customer experience. Banks are sitting there saying “Yes, but Moven is never going to sell a home mortgage!” They’re missing the point.
    Especially for millennials, they’ll be quite happy to take different products and services from different financial service providers – they won’t expect bundled up-sell or cross-sell as a pre-requisite, neither will they expect that a branch will make you better at providing these services.
    So banks better get used to the fact that as IT and service companies, they will be assessed not on their products, not on their networks, but there ability to serve and match the customer experience of much lower friction, better focused digital competitors – product by product, service by service.
    Brett King
    Breaking Banks

  • Hi Chris,
    Great summary of the “banks as an API” prediction.
    You are correct that banks will need to find new business models as their revenue generating services are increasingly disrupted by specialist digital service providers (Brett’s death by a thousand cuts).
    I believe one of the weaknesses they have (as pointed out by Ron) could be used as a strength. Banks are highly regulated and as such have a degree of trust that few tech companies can compete with. At the end of the day, if you put your money in a bank account it is federally insured, not so if you buy Bitcoins.
    Rather than simply positioning themselves purely as financial integration points, banks have an opportunity to be the trusted middle-man for all things that require extra layers of regulation (that’s their real strength – dealing with regulation).
    As the internet community scrambles to find ways to better deal with identity and authorisation banks have an opportunity to step in and offer services like verified identity and credentials (do you trust Google and Facebook to provide you with a verified age for a user?).
    The data they have about user’s behaviour (via the various 3rd party services they choose to integrate with) is valuable and unlike the tech companies, how they manage and share that data is regulated to some extent.
    I have heard the argument that millenials are unconcerned about privacy but I expect there to be a big backlash when they begin to realise their lives are being managed remotely and they exist in filter bubbles created around them by people who control their online experiences.
    At this point I expect people to start questioning, “Why do I log-in with Twitter, or Google or Facebook when I can log in with my bank’s digital identity? My bank already knows more personal details about me than anyone else and are heavily regulated as to what they can do with that information.”
    As a short illustration, I considered logging in via Twitter to post this comment but TypePad wants to be able to post to my timeline and edit my profile! Why?!
    Dave Birch said it best, “Identity is the new money”, not purely because personal information has value to the ad-driven revenue models of most Internet companies, but also because we may start depositing our identity in banks rather than tech companies.
    Adrian Hope-Bailie

  • Banks are the custodian of people trust and managing risks is their business while offering financial products & servicing. That’s why regulators keep a watch on their policies & actions.
    Playing a financial integrator role in future shouldn’t be a challenge for smart banks, this way they will be able to focus more on customer experience while delivering higher value.
    Banks need to innovate new business models using capabilities of their design & technology partners to remain at forefront of banking.
    Smart banks have setup innovation function under CEO to lead & drive such initiatives.
    Future of Banking is exciting.

  • Hi Chris,
    Your blog has generated some great comments. Yes it true that banks need to innovate more (given the constant attacks from usurpers they need to innovate like maniacs) and perhaps they should adopt some of the best practice of IT companies, but this should not be at the expense of their regulatory responsibilities that Ron Shevlin has pointed out. After all it is this regulatory environment that banks have to work in that has given you and I the confidence to trust your bank with your finances because they are safe, secure and private. Nothing is ever black and white is it? There are always plenty of shades in between.
    The tricky part for the banks is knowing what they can build in-house, what they should contract help for and when to let the whole job be handled by a 3rd party IT developer. Get this wrong and things can get messy.
    Adrian’s comment about banks getting into the digital identity business hits the nail on the head from my perspective. Dave Birch talks about this all the time and he is right. Why should banks do this? Well because as Adrian very entertainingly says:
    “I have heard the argument that millennials are unconcerned about privacy but I expect there to be a big backlash when they begin to realise their lives are being managed remotely and they exist in filter bubbles created around them by people who control their online experiences.”
    The backlash Adrian talks about will have them running to their banks for some privacy shelter; will the banks be ready to receive them?
    This of course brings me to a subject that I’m very interested in; having digital receipts stored at your bank and available on request. Receipts are part of your history and goes to define your digital identity.

  • First of all, thanks for the kind words everyone. Of course banks can’t really act like IT companies because they are regulated in a way that IT companies are not. Having said that, the idea of “amazonisation” (i.e., opening up APIs both internally and externally) is a sound strategy to bring more value into the financial services space. I suspect that the issue is that bank management see “API stuff” as some dreary technical issue that can be pushed down to the IT guys, not realising that it is a key business strategy for the coming decade.
    If banks are relegated to be pipes connecting financial services providers… well, Thames Water is a regulated pipe and they make a ton of money.

  • Chris
    a few themes/thoughts based on experience in the UK:
    1. Trust: there are 2 flavours of consumer trust. Banks are pretty much well trusted to keep money safe. Banks are pretty much not trusted to look after the best interests of their customers.
    2. Future role of Banks: mainly as b2b type infrastructure and core service (IT) providers, as you identify. Similar in our view to mobile phone network providers, where VMNO’s (Virtual Mobile Network Operators) like Virgin Mobile provide the customer facing services.
    3. Free Wallet: the UK Competition Authority is reviewing “Frees” Banking (as currently delivered by cross subsidies and hidden charges. The outcome of this review might well have an impact not just on banks but other envisaged “free” wallet services, funded by other revenue streams.
    4. Where are the comments to your scholarship from the banks? Are they not in the conversation?
    Alex Letts, Ffrees UK

  • Chris
    As you know most banks operate monolithic IT systems that were designed and built in the 80’s (I’m ashamed to admit by agedness but I had a hand in that building for a couple of banks and I know those systems still exist). They currently operate on a ‘if it ain’t broke, don’t fix it’ mentality and have no business driver for the wholesale re-architecting of their IT services as long as they can continue to be supported.
    I suspect one of the drivers for your new component based model is the PRA driven ring-fencing of retail banks. This will free up the new RFBs from the IT systems of their parent company and they can explore new and more effective models whilst concentrating on adding better value and service to their customers.
    Theresa Spencer-Brown
    CCSBusiness http://www.ccsbusiness.co.uk