What amazes me about the banking system is that the banking system does not believe it needs to change. It does not believe it is being disrupted by technology. It is dismissive of many new start-ups and innovators. And it points to past performance for the reasons why.
There has been no major disruption in banking for the past century, apart from the issues the industry created for itself (debt-fuelled crises) and by the regulators who then have to fix the mess. The banking system is integrated and entwined with the economic system, and the economic system determines the elections of politicians. Hence, the politicians work closely with their financiers to ensure it all works in the best interest of the country.
That is why each country only has three or four large banks, and why there is no competition in banking because regulation is the greatest barrier to entry.
Or that is the view within the industry.
A competitor and a threat?
The banking licence issued to banks protects them from competitive threats, and so the only competition they face is each other. Then, through mergers and acquisitions, they aspire to become number one, two or three in their markets, and then look overseas for expansion.
But what is interesting is the innovator’s dilemma, and the view that new competition from outside can be dismissed because it appears irrelevant.
Many of the rumoured competitors are probably not competitive threats at all. Google, Amazon, Facebook and Apple (GAFA) are all good names to throw around but, 20 years ago, it was Microsoft or IBM becoming a bank. They never did and it is likely that the GAFA group never will. That is in part because their focus is on dominance in the digital space, rather than the financial space, and that barrier to entry into core banking: the licence.
And when firms do start to shake the banking tree, as Alibaba did recently in China, then the banks start applying pressure on the regulator and the government to shut such services down.
So where's the threat?
But what if something was on the radar but such a tiny buzz that you flick it away like a fly? What if something was building that would totally reshape the industry but, because it seems so irrelevant, it is ignored? What if there was no need to use banks at all, and the system could be circumvented? What if you could create a new value exchange that had no regulator, apart from the community that use it? What if you could move funds globally, for no fee and with no Swift involved?
That is what Bitcoin is trying to achieve and is why I keep blogging about it.
I do believe it will end up being regulated, but the major players in the Bitcoin ecosystem do not currently include a single bank. Therefore, if it does go mainstream sometime in the near future, there will be a completely different group of players to deal with such as Ripple, Coinaaa or something else unseen.
We do live in interesting times.
And finally, if you don't believe that Bitcoin is a threat to banking, then how come all the people who are passionate about Bitcoin worked in payments and banking before?
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
