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How can a bank guarantee its future?

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Three people are chatting in a bar.

The first says: “It’s great working for a FinTech start-up as I get to travel the world.  As a result, I can easily call my partner and tell them I’m on a business trip to stay with my other love.”

The second says: “Well, you should work for my tech firm.  I get to travel a lot too and have loves in over ten cities.”

The third says: “Maybe you should have joined my bank.  I get to tell all my loves that I’m travelling and stay at home working on the accounts.”

Something like that anyway.

It’s not to say bankers are boring, because they’re not, but it is to that banking should be boring.  Banking and innovation doesn’t go together.  Innovation creates risk and risk is unacceptable in a financial marketplace.  That is why it is difficult to get new things started.  We don’t want to start new things.  We want things just the way they are: manageable, predictable and boring.

So it’s interesting how we’ve spent the last five years talking about sandboxes, creativity and design in financial technologies.  The idea is to innovate outside the markets.  Take the risk without impacting the bank’s operations.  Test and trial until you’re happy with how it all works.

That’s all good, but then how do you internalise the innovations after you’ve tested them?  This is the fundamental dilemma of a bank.  How to take the play things and make them meaningful.  I guess this is also why I see so many major banks investing in innovation as a marketing program, rather than as a serious venture to change the bank.

As a marketing program, a bank has to look innovative even if it isn’t.  This is not unique to banks however.  Just look at the story I posted yesterday about Wal*Mart.  Wal*Mart dominated the US grocery industry and has ceded control to Amazon by not digitalising fast enough.

Banks suffer the same dilemma because they see the opportunity of technology to engage, for example, in an open marketplace but they fear embracing such change.  Just as Wal*Mart finds it hard to have third parties selling on their platform cheaper than the company’s prices, banks fear engaging FinTech’s, as that means ceding control.  If a customer can get their loans, cards and mortgages cheaper from a third party on the bank’s marketplace platform, then how does the bank make money?

This is where the fundamental change in thinking has to kick-in.  Amazon don’t like third parties selling cheaper than Amazon on the Amazon platform, but they have 350 million things on their platform from third parties.  Why?  Because they’re curating the platform and use software algorithms to ensure that they’re not the cheapest, but they’re the most trusted with the fastest delivery (although that’s not always the case as the postscript at the end of this blog illustrates).

This is how banks should really see innovation, sandboxes and FinTech.  A move to a marketplace of open collaboration where the bank curates the platforms, invites the third-party providers to offer services to their customers, and ensures that the customer gets the best choices with the most trust because the bank is curating the platform.

This would move the bank out of the innovation conundrum and start to rearchitect the business to compete with the digital future that Wal*Mart and others are all fighting.  If they don’t follow the example of such players, then sure, banks will lose their position and future.


How A Book About Flies Came To Be Priced $24 Million On Amazon by Olivia Solon for Wired, 27 April 2017

Two booksellers using Amazon’s algorithmic pricing to ensure they were generating marginally more revenue than their main competitor ended up pushing the price of a book on evolutionary biology — Peter Lawrence’s The Making of a Fly — to $23,698,655.93.

The book, which was published in 1992, is out of print but is commonly used as a reference text by fly experts. A post doc student working in Michael Eisen’s lab at UC Berkeley first discovered the pricing glitch when looking to buy a copy. As documented on Eisen’s blog, it was discovered that Amazon had 17 copies for sale — 15 used from $35.54 and two new from $1,730,045.91 (one from seller profnath at that price and a second from bordeebook at $2,198,177.95).

This was assumed to be a mistake, but when Eisen returned to the page the next day, he noticed the price had gone up, with both copies on offer for around $2.8 million. By the end of the day, profnath had raised its price again to $3,536,674.57. He worked out that once a day, profnath set its price to be 0.9983 times the price of the copy offered by bordeebook (keen to undercut its competitor), meanwhile the prices of bordeebook were rising at 1.270589 times the price offered by profnath.

Amazon vendors use algorithmic pricing to ensure that they can automatically change their product prices based on a competitor, for example. So it is clear why profnath would be keen to continually undercut the pricing of its competitor, but less clear why bordeebook would keep its prices more expensive. One reason might be that it has very good feedback and would bank on the fact that people are prepared to pay a bit more for a trusted seller. Eisen speculates that it is because the retailer doesn’t actually have the book in its possession, but would have to source it as soon as someone had requested to buy it.

The price of the book peaked on 18 April at $23,698,655.93 (plus $3.99 shipping), before profnath saw sense and dropped its price to $106.23.

The comical automated price war goes to show how retailers need to put pricing parameters in place when employing these sorts of algorithms.


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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, 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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