Chris Skinner1_resized
Chris Skinner May 14, 2015

The regulatory effect in banking

Banking is not being disrupted; it is being evolved. The evolution is in the architecture of banking from a physical toward a digital play. As with books, music, entertainment and travel agents, banking is something that can be done through devices with no physical need for service. You cannot have that in airlines (you need to physically travel) or gas stations (you need to put gas in your engine physically) but you can have some services, like banking and music and travel orders, made through a pure digital play.

However, unlike music, books and travel agents, banking will not be wiped out by a new player creating a new way of doing things. There will be no iTunes, Uber, Amazon or Expedia of banking. The reason for this is that, unlike all those other lines of business, banking is regulated. Banking is integrated with government policy; it’s a political instrument; it’s used as the government’s control mechanism for social order; and it’s core to a country’s economic success or failure. For this reason, it is in government’s interest to licence value stores and value exchanges, which control monetary supply and economic stability. As a result, banks are given the luxury of time to adapt to the Digital Age that book stores, travel agents and music shops didn’t have.

Equally, we get a lot of folks saying that a new giant will emerge from the fintech community to displace banks; there will be a new JPMorgan Chase or HSBC, which might be an Apple or Kabbage.

I don’t think so. First, the person-to-person community (P2P) providers are tapping securitized funds from the banks, so banks win whether they do the lending or the crowdfunders do it for them. In fact, the banking support cuts costs and displaces risk to the P2P platform, so it’s more efficient in many ways. A win-win for the banks, in other words.

Cryptocurrencies, meanwhile, have proven they can’t be trusted – Mt. Gox, Bitstamp, the Bitcoin Foundation – and so the technology is moving from the Wild West of the Web to the Ripples of the banking fraternity. Again, from chaos comes control, and banks keep their status of being transactors and stores of value.

Mobile will take banking to the masses and the millions of unbanked. What’s interesting, then, is that the unbanked become banked because they build mobile money credit histories that can be trusted. When M-Pesa launched in Kenya in 2007, there were only 2.5 million adults with bank accounts; eight years later, over 15 million Kenyans have bank accounts, thanks to mobile credit histories. The banks win again. 

Meanwhile, as all this so-called disruption is happening, the banks can live with the threats and opportunities therein because they know they have time to evolve due to their regulatory requirements. As Transferwise and Holvi bathe in the misguided belief that the regulator doesn’t care about them, there will come a day when they do. Come that day, the Transferwises and Holvis will either be acquired, merged or moved into the banking control ecosystem or shut down. Full stop.

The only other industry that works in a similar way to banking is probably pharmaceuticals, where inventing the next big drug product is the focus. That is because the pharma industry works on having patents, just as banks work as an industry based upon licences. Without patents or licences, what have you got? A sexy front end distribution system or app that sits like a cherry on a cake. Very pretty, but changes nothing in the core ingredients of the system.

Nice try y’all.

Important caveat: I am not saying that banks will not need to change. They crucially must adapt to survive. Their survival being determined by how quickly they can step up to the new model challenge of being digital and not physical. The ones who work out their digital core architecture, infrastructure and organizational evolution strategy (along their branch closure and staff redeployment strategy) first will be the ones that will lead the rapid change from physical to digital. The ones who wait will either be beaten by competitive forces or shrink into a shadow of their former selves. 

Meantime, the ones who create new models through fintech will be the ones funded and also acquired by the early digital leaders of the traditional system. Either way, they all get evolved into the new model army of the digital financial market. Given 10 years, I fundamentally believe that the biggest banks in the world will still be in the list of the biggest and that there will not be one new name in that list, other than an existing bank we haven’t seen arise yet (maybe an African one for example). And that institution will be a bank that creates an Uber-style version of their banking offer, perhaps, but it won’t be an Uber of banking.

Mr. Skinner is chairman of the Financial Services Club, CEO of Balatro Ltd., comments on the financial markets through his blog the Finanser, and is the author of Digital Bank. He can be reached at chris.skinner@fsclub.co.uk.

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