Mobile wallets: a very relevant threat to the banking establishment

I’ve talked quite a lot about adapting to change lately, and will continue to do so, because banking-as-usual is not an option. It is similar to standing in the middle of the road. If you stand there for long enough, you’ll get run over. This is also true in banking: if you stop changing, you die.

Now banks know this – they’re not stupid – and have been changing a lot over the past decades. Since I started in the industry, we’ve seen the mass adoption of cashpoints; the move to offshoring call centres; the deployment of online and now mobile banking; the rise of algorithmic, high-frequency trading; the drive towards server farms co-locating next to the stock exchanges; and the big trends towards blockchain, cloud technology and machine learning overall.

Strong as ever

This is why banks are as strong today as they’ve ever been, and I think that anyone who says that banks don’t change or are doomed is an idiot. They’re not doomed unless they stop adapting to change and, so far, banks have done a pretty good job of doing so.

In fact, name one bank that has failed due to technology. I cannot think of one. I can think of many that have failed due to poor risk management, but failing due to technology is just not happening. Will it ever?

Well, I guess it goes back to my story of the technologist who cried disintermediation: it will only happen if a bank resists change. Banks will be doomed if they resist changing legacy systems, especially those at the core.

Now when I talk about getting rid of core systems, many people reply by saying it is not necessary. You can build adjacent systems that suck the data out of the legacy and analyse and use it to feed application programming interfaces and apps. In other words, you build middleware to reach into the graves of the old data processing systems and suck out their knowledge. I personally don’t think this is an advisable long-term approach, because sucking the data out of the dead is not really a viable strategy for the next century, is it?

No. Admit those old systems are dead and replace them. That is the only way to avoid being doomed.

Two systems

Then another thing pops onto the radar, which is the new financial system. In fact, I think there are two financial systems out there today: banking for the banked, and the mobile wallet for the unbanked.

This is the possible future. The mobile wallet looks inoffensive and, for some, irrelevant. M-Pesa and Alipay and the like are for the poor and excluded; conventional banking serves the wealthy and the most profitable.

Now this is where I think we may see the end of traditional retail banking as we know it, as there is a rising financial system that currently complements but, long term, could replace the old financial system. The new consumer financial system is the mobile wallet, and that is most successfully developed in parts of the world that were unbanked and underbanked. As a result, the mobile wallet is being developed by non-banks, and I truly believe this is the innovator’s dilemma writ large.

The Innovator’s Dilemma is a book by Clayton Christensen that argues large institutions see a no-frills product that has stripped everything back to the basics, and dismiss it as irrelevant. It should really be called ‘the incumbent’s dilemma’, as a large incumbent does not want to respond to a product that eradicates all their existing profit and functionality.

What I see today is mobile operators and companies such as Ant Financial developing mobile wallets that can operate across borders, globally. These mobile wallets ignore the banked, and are largely developing in Africa and Asia. They are a route to financial inclusion and, in order to do this, offer micro-loans, micro-savings, easy payments and low-cost digital identification.

Mass take-up?

The thing is that if they offer all of these services, what’s to stop them upscaling? I made this comment the other day about Alipay. Right now, it’s just for Chinese citizens, but what if it puts a nice local language front-end on the app? I would use it.

And if I can do all the things that I can do with a bank on a global mobile wallet that’s cheap and easy, why would I still need a bank?

Sure, I’d need a bank for commerce, trade and investment markets, but for consumer retail banking, the innovators are already a mile down the road towards taking out the banking system.

The real question is therefore not about banks responding to change in the banking system, but whether banks have recognised the real need to change. I don’t see banks being disrupted by technology per se, but I do think they may be ignoring the real innovators for the future, because they see them as irrelevant. As a result, banks are adapting to change, but adapting to the wrong change.

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.