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The reports of my bank’s death are greatly exaggerated

There are a number of debates that pop-up regularly including the war on cash, the end of the branch and the death of banking.  The last one I haven’t blogged about much because it’s irrelevant, but I’ll blog about it today as there are two camps of thought: incumbents and new entrants; and today’s blog is inspired by exactly this argument between Michal Panowicz of mBank (an incumbent) and Brett King of Moven (a new entrant) on twitter.

Incumbents believe they can change and adapt and keep up with fast tech change; new entrants claim that incumbents have the wrong mindset and, like Kodak and Nokia, will miss the mark and disappear.

The first camp claim to be protected by rules, regulations, compliance and high barriers to entry due to governance, gaining a bank license and dealing with complexity.  The latter claim none of that matters, and believe they can attack specific pieces of the system with new business models based upon next technologies.

The incumbents say that they are building new technology structures and reforming their original operations; that legacy systems have been a challenge, but they are being overhauled; that most of the new tech sits on top of that structure anyway, so they can build great user experiences, regardless of the form factor gaining access.  The new entrants claim that if the core is rotten then the rest will be rotten, and that banks are hampered by heritage; stuck in the mindsets of the past; and have no chance if they don’t destroy themselves, rebuild and start again.

It’s a fun argument to watch, but it’s an argument that’s irrelevant.  In fact, I will be so bold as to say that the discussion is meaningless.  It’s a bit like the argument between a zealot and an atheist.  They can talk about it until the sun sets, but they will never get an answer.  In other words, the bank versus death of bank argument is meaningless because it doesn’t matter.  Some startups will eat some of the bankers’ lunch, whilst some incumbents will adapt and survive by changing their business models, partnering with innovative new startups and acquiring companies that cause concern.

Equally, it’s meaningless because history dictates that the death of banking isn’t going to happen.  Most banks are 100 years old or more.  Name any other industry dominated by players that have been around for a century or more? 

Airlines?  Maybe.  Most airlines have their roots back into the 1900s and have grown through acquisition and merger, just like banks.  There are new players out there – SouthWest, Easyjet, Ryanair – but most airlines have been around a long time. 

Grocery stores?  Probably.  Most have high barriers to entry – the store network and margin squeeze through volume play – and have players who have been playing for a long time – Wal*Mart started business in 1962, Tesco in 1919 – but that doesn’t mean new players like Aldi and Lidl cannot make an impact. 

Pharmaceuticals?  Ah, now that’s a business based upon product innovation and patents, who then control the supply chain through copyright.  Sounds a bit like music, but drugs are harder to copy.   GlaxoSmithKline’s roots date back to 1715 and Pfizer to 1849.

And this is where the argument of the new entrants falls down for me, as they continually compare banking to music, entertainment, film, photography and similarly digitally disrupted industries.   But these are the wrong industries to compare with, as these industries don’t have tight regulations, high barriers to entry and strong capital requirements.  The only similarity, which is why they are the continual comparison, is that banking can be a pure digital play which, in context, is the same as music, entertainment and photography.

Banking is therefore similar to these firms but, unlike these industries, it also has many commonalities with pharma, groceries and airlines.  These are markets with a strong store distribution footprint, tight controls and high costs of capital that are similar to the incumbent model of banking. 

So the real dialogue is between the new entrant who think that banking is a pure digital play versus the incumbent who feels that the distribution, controls and costs of banking makes it far more like pharma.

You make your own choice, but my view is that if we really believe some geek in a bedroom can create the uber of banking, then it is like saying that some nerd in a garage can create the next Pfizer.  It is highly unlikely to happen as the incumbent will have the time to adapt.  They may get hurt – vis-à-vis BA with Easyjet and Ryanair or Tesco with Aldi – but the incumbents will find a strategy to survive and thrive in the new world, even with these threats.   

In fact the nearest we have got to the uber of banking so far is bitcoin, as discussed yesterday, and banks are already adapting to that one.  So let’s see who’s right or wrong in ten years.   The incumbent or the new entrant?  Or maybe it doesn’t really matter.


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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  • Chris Skinner

    Still as strong as that article is all thought and little fact, and is similar to the banking debate. We worry about Google etc, but that’s the stimulus for our innovations. Like banking debates, the articles assume the incumbents are ignoring the dangers and they’re wrong. The incumbents have read Christensen and are working out best strategies going forward.

  • Rachel

    A major problem with this argument is that the industries you mention (Airlines, Pharma, Groceries) are all undergoing major disruption as well. Data is changing the distribution models and I can easily see an Uberization of groceries with B2B/B2C distribution of farm to table, or a change in the structure of grocery chains to eliminate food deserts, much like mobile helps with financial inclusion. Heard of Amazon Fresh? Just the start of what’s possible.
    Like banking, airlines have withstood many innovations because they are considered necessary infrastructure to the economy. In fact, it is one of the industries besides banks that enjoy bailout privileges based on too big to fail. But you are thinking that banking is still about the hardware/branch/physical presence. Yes, actually owning a fleet of planes requires major capital, but the travel industry was the first to be disrupted. Reservations and ticketing have completely changed, and there are sites upon sites that are thriving to help travelers access accommodations. The middle man that made travel plans has practically vanished.
    And Pharma is undergoing massive digital disruption, where research, distribution models, and collection of data are dramatically changing the field of access. Owning the patent on a pill isn’t going to be what it used to be. The threshold for entering these markets effectively is significantly lowered by digitization of information and the sheer volume of data becoming available. Being someone with pharmaceutical skills that can tailor medicines to each person, or having computers that can do that, will be amazing. But it won’t be anything like the Pharma we see now.
    So, you are right. They are similar…

  • CS,
    Then try this one
    I’ll ask this in a different way. In 250 years since the start of the Machine/Industrial Age we’ve been living in a state of constant disruption of incumbent industries and businesses. Name ONE industry that when faced with technology shift was NOT disrupted?
    The evidence simply is that no industry survives intact. You are suggesting Banking will be the sole exception to that trend in the last 250 years, based on the fact that it is ‘hard to disrupt’ and incumbents will have time to adapt.
    The problem with most incumbents is that they don’t feel the need adapt until the threat is omnipresent. By that time, it’s largely too late, and they fade into irrelevance.
    History just isn’t on your side in this argument Chris.
    Look some banks will survive. My guess is that probably 30-40% of banks will survive in some form. But by 2025-2030 the biggest value stores, payments networks and customer experiences in payments will be owned by non-bank disruptors or neo-FIs who have a fundamentally different approach to the CX, not the banks that are TBTF today. You could argue that “see, some banks will survive – you’ve just proved my point”, or you could simply argue that that level of disruption will be devastating for most of the incumbents because they’ve already left their run too late to change. Regardless, no industry in history has ever survived this level of attention by disruptors intact – that’s the reality.
    There’s just no historical precedent that banks will ‘win out’. At best, they’ll be sharing the stage with entirely new players who will own the dominant mindshare and market share. At worst, they’ll be the bookstore chains left eeking out a post-Amazon existence.