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How Do Banks Survive? Because of Regulations


We recently celebrated the two hundredth birthday of Charles Darwin, who broke through the prejudiced views of the religious world of the Victorian era by being brave enough to say we were descended from apes. That is a debate that still rages even today, and it is clear that Darwin’s views of the world has shaped much of the outlook we have today.

For example, in business we often cite the fact that only the fittest survive. Darwin never actually said that, however. We think he said something like: “It is not the strongest of the species that survives, nor the most intelligent, but rather the one most adaptable to change.” He didn’t say that either since this was a summary of Darwin’s thesis by Leon C. Megginson, a management sociologist at Louisiana State University.

Darwin’s actual words, if you’re interested, were:

“Owing to this struggle for life, any variation, however slight and from whatever cause proceeding, if it be in any degree profitable to an individual of any species, in its infinitely complex relationship to other organic beings and to external nature, will tend to the preservation of that individual, and will generally be inherited by its offspring. The offspring, also, will thus have a better chance of surviving, for, of the many individuals of any species which are periodically born, but a small number can survive. I have called this principle, by which each slight variation, if useful, is preserved, by the term Natural Selection, in order to mark its relation to man’s power of selection.”

I think I prefer Megginson’s summary. The most adaptable to change will survive. That is the key. And, in banking, this is a mantra that I have seen and heard for many years: We are adaptable to change. We are fast followers. We do not need to innovate and lead. We just need to be at the forefront of change as it occurs.

This is the way most banks behave and perhaps, based upon Darwinism, is the key to why many banks are centuries-old. Or, is it that banks do not need to change because of the barriers to entry, which include high capital ratios based upon deposit holders, regular and detailed regulatory and compliance checks and a market that is crowded and hard to break open?

Some would say it’s hardly worth competing in core banking, as taking deposits means that you need to hold thousands of dollars in safeholding for each deposit holder and then you get an account that hardly makes any profit anyway. Maybe so, but there are those adapting to change like Simple and Moven (formerly Movenbank), Zopa and Kickstarter, SmartyPig and Funding Circle and more, all creating new models of finance and, for some like Fidor Bank, new banks.

This still does not mean that traditional banks need to innovate or lead, but it does challenge their adaptability to change. As mentioned, banks believe they are fast followers of change when required and, if there is any big change in the market they cannot respond to, they would acquire.

If you fundamentally challenged a bank’s operation, in other words, you would be killed or eaten.

That’s the survival-of-the-fittest view of the world. But, in today’s world of fast-cycle change – it took Zynga only 43 days to get 100 million people playing Cityville compared to 38 years to get 50 million to listen to radio – is the eaten-or-kill view sustainable? If you have a challenger who is fast adapting to the changing world and you are unable to fast change, can you survive? If the challenger is adapting and doesn’t want to be acquired, are you truly fit enough to kill the challenger?

That would mean, in banking market terms, that you would need to offer a comparable or better offer than the challenger and be as or more trusted than the upstart. Offering a comparable or better service than a new entrant would be hard, as the new entrant would be built upon a platform perfect for the present whilst the bank would have to adapt their platform built for the past.

That is why banks have consistently failed to do this in the past and is why call centers, internet and mobile are adjuncts to branch operations. It is also becoming a much greater issue due to technology. Banks are data businesses, but as we go through waves of technology change, they are becoming less and less fit and less and less adaptable to change.

That is clearly the case today, as made clear in this BBC News report, which can be summarised as banks put sticking plaster on systems in order to keep functioning but building up a bigger and bigger legacy barrier based upon their inability to change. Equally, if banks are unable to change, then their only other survival strategy would be based upon being more trusted than the upstart. Well, that’s clearly not the case today either. So, banks would be unable to compete with a fast cycle change in the market where a challenger grew in core operations.

This means that the only thing that keeps traditional banking models sustainable are the barriers to entry, namely the regulations.

Mr. Skinner is chairman of the Financial Services Club, CEO of Balatro Ltd. and comments on the financial markets through his blog the Finanser. He can be reached at [email protected].