Fintech disruption. Hype or reality?

Several wannabe-disruptors eat humble pieIn this WSJ article (http://www.wsj.com/article_email/banks-and-fintech-firms-relationship-status-its-complicated-1447842603-lMyQjAxMTA1MzE5ODYxNzg4Wj) e.g. “Time humbles you,” said Ben Milne, co-founder of Dwolla, .... Working with banks, he says, is the difference between running a sustainable business and “just another venture-funded experiment.”

I'm sensing a common belief that use of mobile banking, PayPal, SQUARE, ApplePay, etc. means disruption. I totally disagree. As I've explained in my comment on the other Finextra article (http://qwt.io/s_ketharaman/vi8Q), these PSPs increase revenues of banks.  

Since most fintechs use banking rails, they're dependent upon banks for their own survival. On the other hand, banks can shut down fintechs by simply cutting off their access to the banking rails.

None of this sounds like disruption of banks by fintech. In fact, all of this points to a mutually-beneficial partnership between banks and fintech in which banks clearly have the upper hand.

I think you're right. Do you think the majority of banking exec decision makers see it that way? I keep hearing terms like "banks becoming a dumb pipe" stated in a negative way, but I agree with your comment that the fintechs (on the whole) drive incremental revenue and will actually innovate the industry WITH banks continuing to grow revenues. And it's not disruption of the banks that I see people like me and you talking about - it's disruption of the wider industry. Interesting times :-)

Somebody asked a related question on Twitter yesterday. Let me simply copy-paste my reply:

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Ron Shevlin ‏@rshevlin Dec 17
There's a growing trend of bank execs who talk about disruption and "uberization" but do nothing about it in their own banks.

GTM360 ‏@GTM360 Dec 17
@rshevlin My guess: They're angling for plum jobs in hot, well-funded fintech startups!

Ron Shevlin ‏@rshevlin
@GTM360 I think you're absolutely right.

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When it comes to this dumb pipe - intelligent pipe debate, it all depends on how a bank wants to define its remit. To illustrate my point with an example: Should a bank stop at giving a loan to a builder (which is a 5% margin relatively dumb business) or actually build the world's tallest building with that money (which can perhaps yield 30% margin and is certainly a more glamorous business). I know some bank execs who favor the first option and some other bank execs who favor the second option. For the sake of argument, I've taken regulation out of this equation.

To play a bit loose with an aphorism, it's not as though banks are queuing up in front of the soup kitchen. With whatever boundary they've set for their remits, they're extremely profitable:  

• Financial services was the most profitable sector in FORTUNE GLOBAL 500 in 2013: http://ow.ly/d/3qCc

• Finserv continues to be a very profitable sector. 6 out of 10 most profitable FORTUNE GLOBAL 500 corporations in 2015 are banks. https://twitter.com/GTM360/status/642284454409584641

Neobanks can chant their disruption mantra all they want but their music will stop overnight if their VC funding dries up or if banks cut off their access to banking rails.

Personally I hope the Neobanks can continue as well as all the FinTechs. They are setting the upper boundaries of what is possible in our industry today. The banks "could" move past self-imposed boundaries but have a deficiency of tools and skills to do that, and the structure of most of their operations would make that a risky and time intensive endeavour. Using your builder example, the banks don't have the cranes, cement mixers, architects, steel mechanics etc, and developing that as a capability is hard - could outsource, could partner, could compete with their customer sure, but not a great business design. Of course the likes of BBVA prove it's doable, but I'm sure you get my point :-)

• It's hard for a technology company to develop the capability to maintain accounts, receive customer payments, make salary and vendor payments, etc., on its own. So, it partners with a bank to hold its money.
• It's hard for a retailer to develop the capability to manufacture engines, chassis, plan routes, etc., on its own. So, it partners with a transport company to move its goods.
• "AirBnB is the world's largest hotel chain but it doesn't own a single hotel".

I could go on and on but it's common for a company in any industry to partner with external entities EVEN TO ACQUIRE A CAPABILITY THAT LIES AT THE CORE OF ITS BUSINESS. 

If it's not great business design for banks to partner with external entities to acquire a capability to expand into a new realm (construction), then I don't know too many examples of a great business design in any industry.

My comment regarding not being a good business design refers to competing with your customers. Sorry for any confusion.

TY for clarifying but competing with your customers is also not an uncommon business practice. I've come across it in various industries where a single company changes its position in the value chain from one deal to another e.g. investment banking (buy side, sell side, merchant banking) and engineering (manufacturer, bought-out supplier, prime contractor, sub contractor).

I draw a line at threatening the death / disruption of your customers. Call me old-fashioned but that's a terrible way of doing business. I know many neobanks / finsurgents do that. But, thankfully, at least some of them seem to have realized the folly of their ways, going by a few quotes of their CEOs in the WSJ article I cited above e.g.: 

QUOTE

Brett King, CEO of mobile-banking app Moven, wrote in 2010 that “the death of retail banking is here.” Now, Mr. King counts meetings with potential bank partners among his biggest priorities.

ENDQUOTE

I understand your position! It's been an interesting week on Finextra. Been a pleasure being part of the discussion and I've learned a lot too. Come on 2016 :-)

Re. my comment "I'm sensing a common belief that use of mobile banking, PayPal, SQUARE, ApplePay, etc. means disruption. I totally disagree.", Chris Skinner's blog post - "Fintech is not disruptive, as banks adapt and thrive" - would seem to agree: 

"In fact, the more I think about things the more I realise that most fintech is supplementing the bank industry rather than disintermediating, disrupting or displacing it. P2P is just acting as the credit risk department of financial institutions; Square is just an SME acquirer on behalf of card companies;..."

Depends on your definition of disruption. Disrupting what? The banks? Or the way the industry works? Or something else?

My definitions of disruption, who's disrupting whom / what, etc. are all unchanged from the previous contexts in which I'd used them viz.:

"None of this sounds like disruption of banks by fintech." ; "I draw a line at threatening the death / disruption of your customers."