There are several trends converging to make FinTech and Banks being disrupted very sexy news indeed.
- Post Financial Crisis Bank Hatred
- Shiny Startups Like Square, Stripe and the hard to pin down Bitcoin
- Interest from GAFA (Google, Apple, Facebook, Amazon)
- Interest from VCs
This trend is typified by certain Tech (crunchy) press lately about Bitcoin, Transferwise and Banking Disruption:
I sense there is an assumption that because the logic of what a bank does is actually frighteningly simple, it would be really easy to disrupt them if someone could just get the jigsaw puzzle right.
An Alternative Perspective
I disagree with the mainstream narrative, and at the risk of being contrarian… I propose that a new business model will emerge and has already started to do so. Transferwise, Azimo and others already rely heavily on banking infrastructure. Whilst the hype may suggest they are changing the face of banking, the short term reality is that they are just adding cost (or profiting less), and perhaps a nice UI to the equation for the end user. Banks have caught on to this trend and… I feel a bold prediction coming on:
In the next 18 months banks will actively participate in inviting disruption into the market, and profit from it because they see the opportunity.
Finance is Difficult to Disrupt
The CEO of Moni Technologies said something very interesting at the recent TechStars / Barclays Accelerator launch. He was surprised just how tough the basic regulation you need to get a money transfer business of the ground is. Not just the paperwork but the costs and the sheer amount of over head you take on by keeping up with (for example PCI-DSS).
This is where I think banks can actually help FinTech ‘disruptors’ bring new products and services to market. Banks are actually good at keeping up with regulation, which is costly and makes innovation very difficult…
Banks Need a Change of Mindset about HOW they Invest in Innovation
Because Bank 1.0 has a war on two fronts.
- The drive to being ever more secure, stable and robust in core systems
- The drive for ever more nimble, agile and beautiful customer experience
1) Focusing on Core Systems Could Lead to Losing Market Share
If a bank did nothing but invest in quality, stability and security it risks is losing ground to competitors who would bring the shiny new mobile app to market and win market share.
2) Focusing on Innovation Could Lead to Losing Market Share
If a bank did nothing but invest in features, the core systems could become less robust. The cost of failure is immeasurably high with the potential for fines, bad press and lost business.
But I put it to you that trying to do both is Even Worse!
No bank would actively make a choice to lose market share. So they have been fighting a war on both fronts. Push the innovation agenda, and drive towards ever more stable and secure systems. To quote Winston Churchill “It’s like standing in a bucket and trying to lift yourself out by the handle”.
The mandatory and regulatory spend will continue to eat at least ~70% of IT Spend. Roughly ~20% supports client driven change, leaving just 10% for “innovation” which often takes the shape of “me too” app development.
An Historic Lesson on Business Model Change for Survival
At the turn of the millennium, BT were facing a break up from the regulator Ofcomm as the monopoly player in the UK telco sector. What they did was actually smarter than it first appeared, they got out in front of the regulation and split their business into “Wholesale” (AKA Openreach) and “Retail”.
The Wholesale business had to focus investment on what would allow them to serve many “Retailers” including BT Retail, as well as all the other Telcos (Talk Talk, Virgin Media, Sky etc). The benefit of investing in the tools and capability to “unbundle” the local loop was that this protected the scale if the wholesale business. I’d argue BT got the business model right and survived the transition from “owning the pipes” to “re-selling the pipes” quite well. Below, is an outline for how Banks might improve on their current situation:
Changing the Business Model
It will take an incredibly brave executive to be the first to offer “wholesale” services to competitive brands, retailers and start-ups looking to disrupt the traditional business model. Yet, surely it is better to be well positioned for the future, than a victim of it. The message is a compelling one to the board. Adapt or die watch as the RoE continues to erode over the coming decade as it has over the 5 years.
Bank to Developer means:
- Offering a suite of APIs that are easy to use, self serve and well documented
- Offering tools to manage APIs, access to accounts, data and billing so that an API user can manage and sell on these services downstream
- Developing a Tech Architecture that delivers Internal and External API access that the whole company is behind. No exceptions.
Laser Focused Investment
It’s 2014, and it’s surprising how often IT departments still re-invent the wheel and suffer from NIH (Not Invented Here) syndrome. Leveraging tools like Apigee, DevOps and the sheer tidal wive of desire for vendors to sell “platform” tools into corporates is the first step.
Then IT and Business Execs need to use lead bullets not silver bullets. Kill anything that is not yet in flight, that doesn’t adhere to the new strategy. You can only make the leap if you’re willing to jump.
- Small developers will always out innovate large organisations
- Large organisations are good at “compliance”
- There is no “SDK” for banking or payments
Then the first bank to get this right is incredibly well placed to take advantage of the huge level of VC, Start up and media interest in FinTech. To Quote Steve Jobs:
“Innovation is about the people you have, how you’re led and how much you get it“