A banker and I were talking about the function of a bank. His was the classic view: “A bank is there to take people’s money and lend it out at a profit, while ensuring the risk of non-payment is minimised.”
No, it isn’t, I said. I put the view that the bank is there as a trusted store of value. The lending part is now no longer important, as that can be done through alternative media, such as peer-to-peer lenders.
The banker took exception to purely being a store of value, and felt that the risk management job of banks was a critical part of their function.
I argued that the bank’s risk management function is being eaten by software. This means that credit analytics, transparency and management of risk, and the democratisation of finance is becoming a key change factor, because people can connect directly through marketplaces and platforms.
A losing battle?
At this point he lost it, saying I didn’t understand the complexity of the markets and that there was far more to creating financial markets than just deploying a server.
I countered that anything that can be automated will be automated, and we can see that most clearly in the trading rooms and investment markets as hedge funds and asset managers are replaced by exchange-traded funds and index-linked funds. High-value jobs are disappearing fast, as are low-value transactional jobs, from branch-based customer services to compliance to reconciliations to even programming.
He scoffed, and said that my views were too far out. I argued that it wasn’t a stretch at all: a lot of these changes have already happened, and marketplaces for finance are developing quickly. It’s all based upon apps, application programming interfaces and analytics.
The debate ended in a stalemate, with him believing the bank needs to balance risk and leverage with human insight, while I continued to push the idea that a lot of that balance can be achieved through algorithms.
As I reflected on the argument, I realised the key thing he had missed is that banking is not an end, but a means to an end. The end is what we are buying and selling. A bank provides a method to enable that to happen, but software, platforms and marketplaces can just as easily provide that method in a far cheaper, faster and lower-risk form. That was the point I was really trying to make: that banking is necessary, but banks are not.
Now you may recognise that line – it’s an old one from Bill Gates – so how come banks are just as strong today, if not stronger, than when that comment was made 23 years ago? The answer is that the technology had not reached primetime until now, and the regulator had so far enforced barriers to entry that would not allow new players to enter the markets.
Ready for change?
We are on the cusp of radical change. Some banks are leading the charge, others are watching and waiting, and some have no idea what change is coming. This is because they are led by a C-suite filled with people who either make things happen, watch things happen or wonder what happened. What’s your C-suite like?
You may say: “We’re OK”, and look at other financial institutions with scorn. However, I can tell you exactly how many of institutions are fit for change: half, according to the MIT/Deloitte annual survey of banks’ digital readiness. In last year’s survey, nine out of 10 participants felt that digital transformation is ripping through the industry, but only 46% felt their organisation was ready to respond.
In other words, 54% think they are not ready, even though this is fundamental. Even more telling is that only one in five institutions are believed to be nimble enough to change, while most feel their bank is slow to change. A problem? Maybe. Three out of five employees in slow-to-change banks expect to leave within the next three years.
So, for the banking friend who argued with me, and for all the other C-suite bankers out there: it’s time to wake up.
