I regularly attend conferences where several themes crop up around disruption – that word we hate – disintermediation, and the end of banking as we know it. The problem is I’ve heard it for 30 years and it hasn’t happened … yet. Will it? Let’s have a look.
The first theme is that banks are technology companies and technology companies succeed and fail all the time. IBM, Apple, Cisco and Microsoft have all almost bitten the bullet at some time in their past, and so we throw up the Nokia or Kodak moment. Soon we will throw up the Intel moment …
…. and ask if banks face the same challenge.
Please name a large bank that has failed due to making the wrong technology decision?
All of the companies above made decisions about where technology was going and, when they got them wrong, they failed. Intel bet that the iPhone wouldn’t take off; IBM didn’t take Microsoft and the PC seriously; Microsoft didn’t see the move to cloud and mobile services; and Kodak dismissed digital cameras as a fad. Even Facebook almost died when they got their strategic decisions wrong about how people would access their social connections.
Banks are not like this though. Has any bank failed by not taking on board technology fast enough or betting on the wrong technology? Not yet. This is because they be firms based upon technology but they are not pure technology firms. They are firms that provide financial exchange over technology, rather than technology pure plays. So that’s the fundamental difference between Fin and Tech, and that subtle nuance is an important one as I doubt any financial firm is going to be destroyed by technology as long as they adapt to the way technology impacts their business model. The latter point is far more important, as discussed yesterday.
So let’s move on to the next theme: banks will be disintermediated by technology.
I first heard this one in the 1990s, and everyone reckoned that Virgin or Microsoft would take over.
I put together a strategy for NCR back in 1997 that was based upon the supposition that retailers, telecoms firms and technology giants would buy banks or bank licences and disintermediate the hell out of the industry. Twenty years later, it hasn’t happened. Today, we might sit and look at the giants – Facebook, Apple, Google, Amazon – and say that they will disintermediate the hell out of banks.
We might look at the new players – Zopa, Prosper, Lending Club, SoFi – and say that the credit marketplaces will disintermediate the hell out of banks; and we may wish that the world would move in the same direction as China and Africa where the Alibaba’s, Tencent’s and M-PESA’s can create whole new ways of doing banking; but it isn’t going to happen.
I would love to believe it would happen but the more that banks get disintermediated, the more they adapt and change. They have the luxury of time to adapt and change because the regulators step in and try to work out what model of banking is being impacted by the change demanded of the disintermediator. Eventually, the disintermediator finds themselves subject to so many rules and restrictions that they either have to partner with a bank to maintain liquidity or go out of business (or so it seems).
So let’s look at the third similar, but slightly different theme: retail banks will go like retailers and become irrelevant.
This is where we compare banks to book shops, record stores or travel agents.
Again, it is a flawed argument. The nuance of truth in the argument is that yes, banks do not need so many stores. The branch, or store, discussion is a lengthy one that I’ve discussed too many times to repeat here, but the gist is that banks are not going the same way as books, records and travel. These latter industries acted as intermediaries of things that could be digitalised without any requirement for human activity in-between; banks believe that they need to digitalise but that there will still be a requirement for human activity in-between.
This one is interesting as some argue that the advice and face-to-face touch in banking is irrelevant and will be wiped out within a decade. Unfortunately, the customer does not agree. From The Financial Brand:
Consumers today still crave one-to-one attention from their banking providers, and have a strong preference for in-person assistance when making major financial decisions such as first-home mortgages. That’s according to a study from TimeTrade. In their “State of Retail Banking 2016 – Consumer Survey,” research findings reveal that all ages — but particularly younger generations — say they value the option to visit an actual, physical branch. Both Millennials and Gen Z express a more intense preference for in-person discussions than other generational segments. When it comes to important financial issues, they are among the most willing to visit a bank or credit union branch for advice.
So, I am not promoting complacency here – far from it, banks must lead a digital change or will become irrelevant – but am promoting the fact that the doomsayers and disrupters are slightly naïve if they believe banks will let technology pull the rug out from underneath them and disappear overnight. That hasn’t happened in the last 100 years, and I doubt it will for the next 100.