Community

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

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

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

Ketharaman,

There are banks and networks who will participate and make money out of this new digital realization, however, there will be far less banks (and networks) required. 

When you have a more compelling customer experience, old/traditional players either offer value by providing rails or by partnering. Thus, while there will be those that provide the rails and thus provide value, the majority will simply disappear over time because the value chain has shifted.

For sure there are those that stand to win, but I'm afraid more bankers on the whole will lose than those that win. Is this good for the industry? No, but it is good for the consumer.

BK

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 

Ketharaman,

Square has 1m new merchants on their App - with a link to the banking rails, but they make more on fee than any of the rail partners. Starbucks 50+ million transactions a year going across mobile in a closed loop environment that circumvents the banking rails entirely. But you are trying to argue banks are still winners in this?

The fact is Starbucks has already circumvented the rails.

Square could circumvent the rails at almost anytime (as they already are with 40,000 card case merchants) and the User Experience wouldn't change.

Starbucks and Square own the user experience, therefore control the revenue pipeline. Having the rails is a guarantee of commoditization, not ongoing payments revenue.

The power is at the front-end, and that's where banks are being left behind.

BK 

Darren/Ketharaman,

It behooves me to have a say in this debate.

The fact is this issue has, in part, already been solved. PayPal does $30Bn of transactions that could have been handled by banks in the e-Commerce mix, but aren't because banks thought no one could circumvent their rails. Starbucks circumvented the rails all together and 25% or 26 million transactions a year now skip the exisitng players.

There's 1 million merchants on Square today after just 20 months, processing $4Bn in payments annually - that's 1/8th of all US merchants. That is 1 million merchants that apparently could have been on the existing rails and POS systems if there was a simpler, more cost effective merchant onboarding process provided by the incumbents.

Katharaman - read my book "Branch Today, Gone Tomorrow", it provides proof that 'rails' doesn't mean survival into a new era disrupted by new technology and new behavior.

Consumer behavior is driving expectations that the incumbents aren't meeting fast enough. Non-Bank competitors and new technology layers are filling the gap. The net effect is that the rails have new skins, but the incumbents give up both market share and margin.

You might argue that it's insignificant? 1/8th of US merchants, 25% of Starbucks' in-store payments, and 20% of the online e-Commerce payments traffic! It's just the beginning - we're about to see a few derailments :)

BK

Throw in a NFC enabled iPhone and all bets are off...

Liz,

Fair enough. However, the point still stands. The phone is massively superior in terms of its capability to engage and communicate contextually with end users. Cards simply can't compete on this basis alone, let alone on speed, security and form.

BK

In respect to Finextra's verdict, I would expect nothing else as a friend to the industry. However, Fast Company assesses not the technical capability of banks or FIs in-house or of trading sytems, but what improvements are made in the consumer market. By that measure, banks are definitely behind start-ups because they constrain their approach based on perceived risk and regulatory controls.

Start-ups don't start with that premise - they ask the question How can we improve the consumer experience?

By that measure Square and Starbucks are already literally years ahead of most banks and financial institutions. Banks are still worried about collecting signature cards and whether mobile standards will emerge sufficiently for the regulator to green light specific innovations.