As I make my travels around the world, some markets are open to new financial players but most are pretty closed. Regulators lock out new innovative models, and enable incumbents to be protected or allowed the luxury of time to respond. Peer-to-peer lending is a good example for whilst there are hundreds of crowdfunding and P2P firms out there, some markets have shut down such operations. Another example crops up when I talk about innovators like Klarna and TransferWise, with banks responding by saying wait until they get regulated, that will shut them up.
I don’t agree at all. The view that banks are protected from competition through regulation is an outdated notion, and one that leads too many bankers to be complacent. The fact is that yes, banking is protected by regulation. Governments are too concerned about risk to consumers, citizens, society and the economy to allow any open market exchange of value that has no government oversight. The bitcoiners can try and create this, but instead they created a mess of a cryptocurrency that no-one trusts thank to Mt.Gox, Bitstamp and the Bitcoin Foundation itself. Headline are headline screaming lose your money with bitcoin, does not make for a robust financial system open sourced on the net. This is why the establishment is now trying to make bitcoin acceptable, by jumping on the shared ledger idea and creating trusted distributed ledger systems for banking and payments.
However, regulations don’t protect the banks from all competition. Many market regulators are allowing blockchain developments, supporting peer-to-peer lending and crowdfunding, and pushing for more open access to payment networks and innovation in payments processing. You only have to look at the Payment Services Directive and its spawn of new companies like Holvi, to see that there are new streamlined companies appearing that look like banks, smell like banks, work like banks, but they’re not banks. They’re payment processors, emoney licence holders and narrow finance firms.
Nevertheless, I have encountered markets where banks see these new competitors and where they don’t, as the regulators ban them, and my response to both sets of banks is the same. Imagine you are in a market that is being attacked by all these new players with their new narrow models of finance, peer-to-peer, person-to-person, in real-time and for almost free. How do you react?
This question is just as, if not more important, for banks in protected regulated markets as for banks in open competitive markets. The reason why it is so important for a bank that is protected is because you need a burning platform. You need to create a sense of urgency to change. Why? Because (a) if you’re not being attacked by start-ups today, you may well be tomorrow (regulators can change their positions) and (b) if you can create a new bank model today that can make money out of banking when the core – payments processing and credit – is real-time and almost free, then you can really rock and roll. In fact, in a protected market, (b) is a great way to create a bank that beats the competition time after time, hands down, because this bank is creating innovation after innovation without the burning platform. They are just doing it to create market leadership by imagining the burning platform is there.
Imagine you are in a market with no regulatory protection. How would you respond to a new P2P lending system? Crowdfunding for trade finance? Payments that are free, sponsored by Google ads?
This is the way to market leadership, not cost cutting or flipping the finger and saying get lost, as we’re protected by the regulators.
Right now, Fintech is a real threat to incumbents in open markets and a potential threat to incumbents in closed markets. For the latter, just creating your bank strategy to the idea that these startups can exist in your closed market is a fantastic way of building an urgency to change and become digital.
I guess, as my final example of change, I always revert back to Jyske Bank.
Jyske Bank is an unprepossessing Danish Bank that rocks. They are innovators in culture and even run their own TV channel. I love the Jyske Bank story about how they created their burning platform:
Jyske ran a meeting for all staff in 1999 to shake things up.
The meeting was all about how a Swedish Bank had decided to acquire Jyske Bank.
The new CEO stood up and explained how they had always been interested in getting a foothold in Denmark and this was it. They liked to have Jyske products as they had always been fascinated by the bank.
It kind of smacked of aliens taking over the Earth which, bearing in mind this was a Swedish Bank taking over a Danish Bank (think Germany/Netherlands, France/England, USA/the World), it was.
So the unions were all jumping up and down and shouting about how awful this was, staff were in tears and everyone was frightened … except it was all a joke.
A joke with a purpose – to create the burning platform for change.
You can create a burning platform through a joke, but there really is a burning platform out there right now. It’s called Fintech and if your bank leadership are so complacent as to say we have no need to change as the regulator will not allow this, then I would leave. After all, who wants to work in a place where the level of excitement is one step below a monastery with a vow of silence?