There are a number of banking debates that pop up regularly, including the war on cash, the end of the branch and the death of banking. The last debate concerns two camps: incumbents and new entrants. This article is inspired by exactly this argument between Michal Panowicz of mBank (an incumbent) and Brett King of Moven (a new entrant) on Twitter.
Incumbents believe they can change, adapt and keep up with fast technological change. New entrants claim that incumbents have the wrong mindset, that they will miss the mark and disappear.
Incumbents claim to be protected by rules, regulations, compliance and high barriers to entry due to governance, gaining a bank licence and dealing with complexity. New entrants claim that none of that matters and believe they can attack specific pieces of the system with business models based upon new technologies.
Hampered by heritage
The incumbents say that they are building new technology structures and reforming their operation. They admit that legacy systems have been a challenge, but point out that they are being overhauled, and that most of the new tech sits on top of that structure anyway so they can build great user experiences – regardless of the form factor gaining access.
The new entrants claim that if the core is rotten then the rest will be rotten. They say that banks are hampered by heritage, stuck in the mindsets of the past, and have no chance of survival if they don’t destroy themselves, rebuild and start again.
It is a fun argument to watch, but it is an argument that is irrelevant. In fact, I will be so bold as to say that the discussion is meaningless. It is a bit like the argument between a zealot and an atheist. They can talk about it until the sun sets, but they will never get an answer.
Eat my lunch
The truth is that some start-ups will eat some of the banks’ lunch, while some incumbents will adapt and survive by changing their business models, partnering with innovative start-ups and acquiring companies that cause concern.
Moreover, history dictates that the death of banking is not going to happen. Most banks are 100 years old or more. Name any other industry dominated by players that have been around for a century or more.
Airlines? Maybe. Most airlines have their roots back in the 1900s, and have grown through acquisitions and mergers, just like banks. There are new players out there – Southwest, EasyJet and Ryanair – but most airlines have been around a long time.
Supermarkets? Probably. Most have high barriers to entry – the store network and margin squeeze through volume play – and have been around a long time. Wal-Mart started business in 1962, Tesco in 1919. But that does not mean new players such as Aldi and Lidl will fail to make an impact.
Pharmaceuticals? Now that is a business based on product innovation and patents, which then control the supply chain through copyright. Sounds a bit like music, but drugs are harder to copy. GlaxoSmithKline’s roots date back to 1715, and Pfizer’s to 1849.
Banking is not music
And this is where the argument of the new entrants falls down for me, as they continually compare banking to music, entertainment, film, photography and similarly digitally disrupted industries. But these are the wrong industries with which to draw comparisons; these industries do not have tight regulations, high barriers to entry or strong capital requirements. The only similarity is that banking, like music, entertainment and photography, can be a pure digital play.
Banking is therefore similar to these sectors. But unlike these sectors, banking also has many commonalities with airlines, supermarkets and pharmaceuticals companies. These are markets with a strong store distribution footprint, tight controls and high costs of capital similar to the incumbent model of banking.
Saying some geek in a bedroom can create the Uber of banking is like saying that some nerd in a garage can create the next Pfizer. It is highly unlikely to happen, as the incumbent will have the time to adapt. They may get hurt – see British Airways with EasyJet and Ryanair, or Tesco with Aldi. But the incumbents will find a strategy to survive and thrive in the new world, even with these threats.
In fact, the nearest we have gotten to the Uber of banking so far is Bitcoin, and banks are already adapting to that one. So let’s see who is right or wrong in 10 years: the incumbent or the new entrant?
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
