I’ve blogged quite a bit about adapting to change lately, and will continue to do so as banking-as-usual (BAU) is not an option. It’s similar to standing in the middle of the road. If you stand there for long enough, you’ll get run over. This is as true in banking: if you stop changing, you die. Now banks know this – they’re not stupid – and have been changing a lot over the past decades. Since I started in banking, we’ve seen the mass adoption of ATMs; the introduction, growth and move to offshoring call centres; the deployment of online and now mobile banking; the rise of algorithmic, high frequency trading; the drive towards server farms co-locating next to the stock exchanges; and the big trends towards blockchain, cloud and machine learning overall.
This is why banks are as strong today as they’ve ever been, and I think that anyone who says that banks don’t change or are doomed is an idiot. They’re not doomed unless they stop adapting to change and, so far, banks have done a pretty good job of adapting to change.
In fact, name me one bank that has failed due to technology? I cannot think of one. Ever. I can think of many who have failed due to poor risk management, but failing due to technology is just not happening. Will it?
Well, I guess it goes back to my story of the technologist who cried disintermediation: it will only happen if a bank resists change. If a bank resists the march of time and this was the point of my ticking timebomb blog yesterday. Banks will be doomed if they resist changing legacy systems, especially those at the core.
Now when I blog about getting rid of core systems, many people ping me a note saying it’s not necessary. You can build adjacent systems that such the data out of the legacy and analyse and use it to feed APIs and apps. In other words, you build middleware to reach into the graves of the old data processing systems and suck out their knowledge. I personally don’t think this is an advisable approach to a long-term future, as sucking the data out of the dead is not really a viable strategy for the next century, is it?
No. Admit those old systems are dead and replace them. That is the only way to avoid being doomed.
Then another thing pops into the radar which is the new financial system. In fact, I think there are two financial systems out there today: the banking for the banked, and the mobile wallet for the unbanked.
This is the possible futureworld. The mobile wallet looks inoffensive and, for some, irrelevant. M-PESA and Alipay and such like are for the poor and excluded; banking serves the wealthy and the most profitable.
Now this is where I think we may see the end of traditional retail banking as we know it, as there is a rising new financial system that currently complements but, long-term, could replace the old financial system. The new consumer financial system is the mobile wallet, and that mobile wallet is most successfully developed in parts of the world that were unbanked and underbanked. As a result, the mobile wallet is being developed by non-banks, and I truly believe this is the innovator’s dilemma in full action.
The innovator’s dilemma is the book by Clayton Christensen that argues large institutions see a no-frills, product that has stripped everything back to the basics, and dismiss it as irrelevant. It should really be called the incumbent’s dilemma, as the large incumbent does not want to respond to a product that eradicates all of their existing profit and functionality. The heart of the dilemma is articulated by Christensen as follows:
“The reason [for why great companies failed] is that good management itself was the root cause. Managers played the game the way it’s supposed to be played. The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: listening to customers; tracking competitors’ actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit. These are the reasons why great firms stumbled or failed when confronted with disruptive technology change.
Successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets. Yet, to expect the processes that accomplish those things also to do something like nurturing disruptive technologies – to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies and can only be sold in insignificant markets– is akin to flapping one’s arms with wings strapped to them in an attempt to fly. Such expectations involve fighting some fundamental tendencies about the way successful organizations work and about how their performance is evaluated.”
So, what we see today is the mobile operators and companies like Ant Financial developing mobile wallets that can operate across borders, globally. These mobile wallets ignore the banked, and are largely developing in Africa, India, Indonesia, China, the Philippines and other markets. They offer cheap financial inclusion and, in order to do this, offer microloans, microsavings, easy payments and low-cost digital identification.
The thing is that if they offer all of these services, what’s to stop them upscaling? I made this comment the other day about Alipay. Right now, it’s just for Chinese citizens but what if they put a nice local language front-end on the app. I’d use it.
And if I can do all the things that I can do with a bank on a global mobile wallet that’s cheap and easy, why would I still need a bank?
Sure, I’d need a bank for commerce, trade and investment markets, but for consumer retail banking, the innovators are already a mile down the road of taking out the banking system.
The real question is therefore not about banks responding to change in the banking system, but whether banks have recognised the real need to change. You can adapt to change for sure, but if you’re adapting to the wrong change, well then you have a problem.
In conclusion, I don’t see banks being disrupted by fintech, but I do think they may be ignoring the real innovators for the future … because they see them as irrelevant.