Just to finish off my contention that banking is not being disrupted, just evolved or adapted if you prefer, it’s worth a thought about what would it take to cause a disruption.
First, I don’t think of disruption in a dictionary sense but in the sense that Clayton Christensen meant it in the book The Innovator’s Dilemma. This definition goes as follows:
Disruptive innovation, a term of art coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.
And the question today is whether the Klarna, Holvi, Zopa, Lending Club and brethren are doing the above or not?
To a certain extent, it seems clear that they are. According to Foundation Capital, P2P lending and crowdfunding will be worth over $1 trillion by 2025 and companies like Apple are taking over the customer wallet. The counter-argument is that there are banks that sit behind all of these movements, with wholesale markets moving heavily into support of the likes of Lending Club. Equally, others see markets expanding. For example, many banks won’t lend to high risk projects r companies. A new start-up small business will always find it hard to get unsecured lending from the bank, unless they have a robust business plan. But companies like Kabbage and Funding Circle have stepped into this space and are helping to widen markets. According to today’s Telegraph, small businesses are getting access to over £2 billion of new funding through alternative lenders. But then, Funding Circle does partner with banks like Santander to do this, so they’re basically picking up business that banks don’t want. Is that the disruption?
Possibly. Today, banks don’t want this business. Tomorrow, it’s their core business that’s gone. Equally, bank are not helping themselves. Today’s Financial Times: “UK banks are charging businesses that need short-term finance £425m a year in “hidden” extra fees, according to research.”
Surely, by giving away future business with one hand whilst sticking two fingers up at existing business with the other, banks are trying to destroy their futures rather than build them?
This should be a concern, but is P2P going to be the massive disruption that some believe is happening, or will banks partner and then merge and acquire with P2P lendersa and crowdfunders. Maybe the latter is likely if these firms become mainstream.
After yesterday’s blog, Holvi made clear that they have regulation and are also operating in a bank-like manner.
If it looks like a bank, walks like a bank, smells like a bank, surely it’s a bank?
No. It’s a payment services provider. However, if payment service providers started offering core deposits and loans as well as payment services, then yes, they’re a bank and would need a bank licence. And have Transferwise, Holvi, Funding Circle and their brethren yet really made a mainstream impact on core bank business, or just built around that business? I would contend the latter today.
But, and here’s the real point of all this, tomorrow. Tomorrow is the question. Are these companies that are small beans today relentlessly going to move up market to displace the established firms?
Will the largest financial institutions of tomorrow be a Lending Club or Alibaba? Over the past few weeks I’ve been arguing no, but maybe you should be asking: does Chris believe this?
The reason I’ve been arguing against the Fintech tide is that many banks will say to me: “we have over X million customers today, and we know what we are doing. The regulations protect us from competition and the technology we can incorporate over time.”
Which side do you believe and where are you placing your bet as, in ten years, one of the other will probably be true. Most bankers I talk to believe they have time to adapt and that they are adapting. Most technologists I talk to claim that banks are too slow to adapt, their cultures are too traditional and their leadership too weak.
Which do you believe?
I claimed that the size and regulatory structure of banking is too much of a barrier to allow some upstart to take over their core business, but disruptive innovation is “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”
Are we seeing this today?
Finally, I recently asked Where is the Uber of Banking? that sparked a really interesting twitter debate:
@Chris_Skinner it’s cheaper to build the uber of banking than it is to explain it to banks. Why spend the money to explain it?
— Ian Grigg (@iang_fc) March 31, 2015
— Carl Marc Forcestein (@MarcHochstein) March 31, 2015
@Chris_Skinner banks operate as closed processing and distribution networks. If 1 opens up BPaaS/APIs we may see many ‘Uber of banking’
— Kevin Simback (@KSimback) March 31, 2015
Along with comments from many others.
So now it’s back to Chris believing that disruption is where it’s at whether you like it or not, and arguing that banks must act now. Some are but many are not taking this seriously, and they’re the ones that will be disrupted if they don’t watch out.
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