Banking lets all the 'fun fashionable' stuff happen

Great post!

Its so easy to laud the latest bit of distruptive tech and disparage traditional banks for having hulking legacy systems that hold them back, whilst forgetting that it is these very legacy systems that make traditional banking work in a (largely) safe and secure way.

Liz,

You're absolutely right. We need the manufacturing layer, the pipes/wires to transmit securely, along with the regulatory guarantees for safety and security. We're not going to circumvent the banking 'system' in this respect any time soon.

Unfortunately for the industry, however, we don't need every bank in the system currently to support the wires - we only need a few. So with this new found discovery of the consumer experience, it is inevitable that slower banks that don't provide key infrastructure to the front-end will simply be consolidated out of existance. It may take a decade or so, but the same forces acting on bookstores and media distributors is already at work in the banking space.

What banks need to work out right now is how they provide value in the new normal. 

Brett King
BANK 2.0 

Brett I agree with you. We will see a consolidation within the banking world on who will maintain those 'pipes'. API banking is a real trend and I predict we will be seeing a lot more of it in the future. 

But I have to call you out on comparing banking to bookstore and media. Book stores and media are in no way comparible to the level of regulation banks have to deal with. International regulation actually exists that bars banks from closing branches. It's actually against the law. No regulation like that exits for newspapers or bookstores and that is just one example. A closer comparison could possibly be healthcare. 

Ren Reynolds, during the virtual currency debate at SXSW, warned startups not to allow trading of credits or allowing transactions because 'that would make you a bank and you *don't* want to be a bank' 

Liz,

I get the differences. However, banks at the end of the day are businesses. As we've seen in the publishing and media industries, if you don't have customers, you don't have revenue, and thus, you don't have a business.

Regulation won't save you from no revenue unless the government and regulators decides to nationalize the banking industry. However, why would you do that when customers are already clearly showing that they're happy to interact with a new layer that accesses the banking space.

It's far more likely that regulation will have to change.

BK

Regulations change? Lol! That gave me the biggest laugh of the day.

Regulations don't change - new regualtions (that do the same thing - only slightly differently) get layered on top of old ones until your swiming in a alligator-filled swamp with interconnecting, overlaying branches, roots and snakes that could bite your arm off. 

Exactly!

So in the end - with no revenue, and with changing behavior across the spectrum, the distribution layer fragments and falls apart. There remain a few core banks that have the mass and groundswell to remain viable, but the likelihood of goverment taking over the branch business just to cater to a dwindlining demographic is highly unlikely.

The move instead, will be to protect and regulate this new layer. Thus emerges a secondary licensing structure. However, what doesn't happen in this scenario is that things stay the same and the incumbents at large survive.

There will be blood in the water in the retail FI space over the next decade. If I was a betting man I'd be shorting bank stocks at the lower-end of the spectrum, and commercial real-estate :)

BK

@ElizabethL:

Brilliant post. Thanks for pointing out that, as of today, 'no banks' virtually means 'no payments'. All the PayPals and SQUAREs of the world will cease to exist overnight if there are no bank-issued credit cards. Re. your closing sentence, I'd go one step further and say it makes them "naive rebels"!

Excellent post Elizabeth, and very timely.  It's about time the pendulum of fashion started swinging back in favour of good old fashioned banking and payments infrastructure.

Thanks Liz and Brett - great discussion. I would add that equating disruption in banking to new consumer payment methods is missing the point. These are all interesting and the average consumer can relate to new forms of money. But real disruptive in banking will occur in the way they transact and do business wiht each other - and altho not fun, it's much more interesting to people in the business. There will be a growth in infrstructure providers - banks, tech providers, associations - who can deliver scale, security, and speed. This will refocus banks on customers - rather than back-office processing. And then we'll see more innovative financial services that focus on financial management, lending, and investing - not just new ways to pay.

Guys,

A very interesting post this morning again looking at how new entrants marginalize the banking rails:

http://m.upi.com/m/story/UPI-77361332153000/

The quote to focus on:

"...the real threat is the way technology is now changing the whole basis of banking. They are like the dinosaurs, just after the meteorite hit but before the sky turns black, the forests burn and their entire ecosystem collapses..."

The more you believe the banking system is secure in its advantages around regulation and rails, the more you will be at risk as a banker.

BK