Is the disruption of banks a fad?

The great debate across the media and all interested parties is the face-off between the incumbents (banks) and new entrants (fintech start-ups). Each opposing party sees themselves as the true messiah, with the banking incumbents arguing that they are changing, the future is held secure through their excellent and utterly untarnished experience and they cannot only keep up with the fast technological charge, but also lead it. The majority of new entrants fiercely think the incumbents have all been on a recent jaunt to Belgium recently, as it sounds like a huge amount of waffle, and they fully expect the incumbents to disappear into the black hole they belong in (think of Kodak and Microsoft Encarta type disappearances). Highly unlikely, but anyway let me quickly outline the debate for you.

Whatever… (The incumbent’s view)

Incumbents are sitting safe in their regulation and compliance fortresses, safe in the knowledge that the barriers to entry are ever increasing. This view certainly has some credence, but it also depicts their Achilles' heel. Yes, the banking sector has such governance and complexity, and you would need to be a blithering fool to try to emulate totally their now defunct models. But this really misses the point about the new entrants. The new entrants want the banks to stay behind their compliance and regulatory firewalls. The banks are here to stay, but it’s the prime cuts of the banking businesses, which the new entrants are eyeing up. Slowly parts of the banking system will be eaten by the new entrants, who are discovering new innovative business models, based upon excellent new technologies. But then again once the new entrants get big enough they will be more fully regulated, and ultimately the banks will always be able to buy out any threats. Very true!

Heading for a deckin’? (The new entrant’s view)

Technology plays a massive part in this debate. The incumbents are hamstrung by the old technology structures and embroiled in the never-ending need to reform their utterly defunct operations. Legacy systems are the dead weight around their feet. But again this argument ignores the fact that much of the banking system is held back by more than just tech. Their archaic working cultures, lack of departmental cohesion, or even their fundamental inability to make quick decisions is a key reason why the banking system is crying out for positive disruption.

Cruising for a bruisin’? (The realist view)

In truth this debate is utterly irrelevant. It’s not even fun to be part of. It’s like watching an episode of Question Time: repetitive, ongoing and ultimately always inconclusive. The middle ground seems far more likely. Some banks will be taken out and other banks will adapt and endure. That’s life. The banks that survive will do so, but will need to use the many billions they make each year and reinvest these wisely in their future, or buy up the new entrants (more likely). They need to begin to invest in the very start-ups that are seeking to replace them. It will be a slow drawn-out process, but the banks, which will endure, will need to adapt their business models and begin to partner up with innovative new start-ups. Maybe even acquire the ones that scare them the most. That’s one way to stay relevant. Make the founders rich and 'manage' the company. They could take a leaf here out of News International’s ‘excellent’ takeover of Myspace. The banks will continue. They will be leaner, sharper, but so to will the new entrants, who will be semi bought out by the gorillas of the market.

Much ado about nuthin’ (the historian’s view)

Banks have been around for centuries, with many of the current incumbents harking back to the 18th Century. History never lies, but it can be ignored. Considering their longevity it seems unlikely that the banks will disappear. But take a look at the car temples, which were built in Detroit. Now these are all empty, a testimony to the idea that nothing lasts forever. Would any historian have foreseen that? Google’s new ‘temple of doom’ being built in Silicon Valley highlights their current dominance, but could it also one day be seen as the ultimate sign of their demise? RBS after all built their wonderful new HQs in Edinburgh just as their world started to crumble. The return of true Peer-to-Peer powered by technology has been massively underestimated by the banking incumbents. Tech is enabling the pre-banking system of finance to return, with companies like my own (investUP) representing the future, but only when working in tandem with the banks. Now that’s a cool idea. In the Peer-to-Peer world, banks need to adopt a way of working with the new entrants and visa-versa. 

The gospel according to me (my view)

Banking has little to do with industries such as music, film or photography, and hence the demise of banking conglomerates should not be compared with the collapse of the titans of old industries. Banking does have massive barriers to entry, tight regulation and huge capital requirements. What is far more likely that banks will become regulated pools of capital, with all these financial technology new entrants eating slice after slice of their profit margins. The new entrants will be purely digital, with the banks left to enjoy their store distribution systems, tight compliance controls and ever-increasing costs of capital. The new entrants will ensure a few of the banks will be destroyed, however the majority will endure, their ability to be anything other than a regulated pool of capital unlikely. Maybe then we will also lose this banking idea of being too big to fail and we can stop moral hazard occurring in the banking system once and for all.