I didn't say that banks are "too big to be disrupted" but "too regulated to be disrupted"

Quite often, with attribution, I let other websites cut and paste this blog onto their own.  American Banker did that recently but changed the title of the blog from  The reports of my bank’s death are greatly exaggerated to Like Airlines and Pharma, Banking’s Too Big to Disrupt*.  In so doing, the intent of the original became slightly distorted and has led to some interesting responses.   For example, JP Nicols responded with Banks better watch out for geeks in the garage and Brett King noted that Pharma is being disrupted as much as banking.

As I stated in the original piece, it stemmed from a debate on twitter between Brett and Michal Panowicz (summarised here by Jim Marous) and, as a result of the slight distortion of my original message, I need to reiterate exactly the point I am making.

First, banking is not being disrupted. 

It is being evolved.  I have made this point before, and stated that the evolution is in the architecture of banking to be a core digital play rather than a physical one.  Like books, music, entertainment, travel agents and more, banking is something that can be done through devices with no physical need for service.  You cannot have that in airlines (you need to physically travel) or gas stations (you need to put gas in your engine physically) but you can have some services, like banking and music and travel orders, made through a pure digital play.

However, unlike music, books and travel agents, banking will not be wiped out by a new player creating a new way of doing things.  There will be no iTunes, Uber, Amazon or Expedia of banking.  The reason for this is that, unlike all those other lines of business, banking is regulated.  Banking is integrated with government policy; is a political instrument; is used as the government’s control mechanism for social order; and is core to a country’s economic success or failure.  For this reason, it is in government’s interest to licence value stores and value exchanges.  This controls monetary supply and economic stability.  For this reason, banks are given the luxury of time to adapt that book stores, travel agents and music shops didn’t have.

Equally, we get a lot of folks saying that a new giant will emerge from the Fintech community to displace banks.  There will be a new JPMorgan or HSBC, which might be an Apple or Kabbage.

I don’t think so. First the P2P community are being given securitised funds from the banking community, so banks win whether they do the lending or the crowdfunders do it for them.  In fact, it cuts costs and displaces risk to the P2P platform, so it’s more efficient in many ways.  A win:win for the banks in other words.

Cryptocurrencies have proven they can’t be trusted – Mt.Gox, Bitstamp, the Bitcoin Foundation – and so the technology is moving from the Wild West of the Web to the Ripples of the banking fraternity.  Again, from chaos comes control, and banks keep their status of being transactors and stores of value.

Mobile will take banking to the masses and the millions of unbanked.  Yes, what’s interesting then is that the unbanked become banked because they build mobile money credit histories that can be trusted.  When M-PESA launched in Kenya in 2007, there were only 2.5 million adults with bank accounts; eight years later, over 15 million Kenyans have bank accounts, thanks to mobile credit histories.  The banks win again.

Meanwhile, as all this so called disruption is happening, the banks can live with the threats and opportunities therein because they know they have time to evolve due to their regulatory requirements.  As Transferwise and Holvi bathe in the misguided belief that the regulator doesn’t care about them, there will come a day when they do.  Come that day, the Transferwise’s and Holvi’s will either be acquired, merged or moved into the banking control ecosystem or shut down.  Full stop.

The only other industry that works this way is probably pharma, where inventing the next big drug product is the focus. That is because the pharma industry works on having patents, just as banks work as an industry based upon licences.

Without patents or licences, what have you got?  A sexy front end distribution system or app that sits like a cherry on a cake.  Very pretty, but changes nothing in the core ingredients of the system.

Nice try y’all.

Meantime, I am not saying that banks will not need to change.  They crucially must adapt to survive.  Their survival being determined by how quickly they can step up to the new model challenge of being digital and not physical.  The ones who work out their digital core architecture, infrastructure and organisational evolution strategy (along their branch closure and staff redeployment strategy) first will be the ones that will lead the rapid change from physical to digital.  The ones who wait will either be beaten by competitive forces or a shadow of their former selves.  Meantime, the ones who create new models through Fintech, will be the ones funded and also acquired by the early digital leaders of the traditional system.  Either way, they all get evolved into the new model army of the digital financial market and, give it ten years, I fundamentally believe the that biggest banks in the world will still be in the list of the biggest and that there will not be one new name in that list, other than an existing bank we haven’t seen arise yet (maybe an African one for example).  It’ll be a bank that create an Uber-style version of their banking offer maybe, but it won’t be an Uber of banking.



* someone mentioned that my original title seemed remarkably English which is why the American Banker switched it to something more snazzy.  For the record, the original title is a play on the American author Mark Twain’s comment: “The report of my death was an exaggeration”


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As the Bitcoin Foundation fails, banks wake up

I’ve blogged before about how bitcoin will become institutionalised, that you cannot have money without government, why it needs a Foundation and how a Wild West structure for value exchange will fail.  It’s certainly moving in that direction after the latest revelations about the Bitcoin Foundation, alongside the equally revealing announcements that banks are incorporating the blockchain.  Here’s the latest.

There were lots of news and media sites covering the revealing post made by new Bitcoin Foundation Board Member Olivier Janssens over the weekend.  Janssens was elected to the Foundation just over a month ago and, on Saturday, posted an update on Reddit: The Truth About The Bitcoin Foundation .

It’s pretty revealing.

First of all, the Bitcoin Foundation is effectively bankrupt and The lesson for all of us in Bitcoin is to never put any trust in a centralized org again that wanted to represent Bitcoin.

Urm.  I’m not sure that’s the lesson Olivier.  I think the lesson is don’t give your money away to something that has no regulation, no guarantees and no transparency.  Anyways, the fallout has been pretty interesting.  A few comments on the Reddit post include:

I think it is going to keep coming back to: who manages the funds? [coinaday]

Shh guys – don’t you all realise “blockchain technology” is just the terminology we are using so that we can get bitcoin into banks and big businesses through the back door? [bitcoind3]


The truth is that money turns everything into shit. Centralization and money even more so. [lightrider44]

In fact, most of the community believe that decentralised control of everything solves everything.  It’s an interesting idea.  Today, the 1% control everything and the 99% revolt.  Tomorrow, if the 99% control everything, then what happens to the 1%?  Most likely they find a way to create a new control mechanism and retain their 1% privilege.   It’s an interesting battle.

But the real issue with the Bitcoin Foundation turns out to be the centralisation of focus and then the use of that focus.  As I mentioned in my blog last year:

Why is the Bitcoin Foundation smeared with controversy?  There has been extensive critique of the Bitcoin Foundation and its leadership, such as the discussion yesterday, of their involvement in the Mt.Gox failure.  Former vice-chairman of the Bitcoin Foundation, Charlie Shrem, faces federal money laundering charges for his role in assisting agents of the infamous online drug marketplace Silk Road.  Executive chairman Peter Vessenes’ relationship to former board member Mark Karpeles, the disgraced CEO of bitcoin exchange Mt. Gox, has been highlighted as inappropriate. In fact, the Bitcoin community in general is divided over the role of the Bitcoin Foundation as a community or industry representative. 

Certainly the Bitcoin Foundation were close to Mt.Gox, and it really doesn’t help when the organisation created to promote and support Bitcoin’s developments is accused of being corrupt.  In fact, between the multiple failures of exchanges in bitcoin and now their organisation created to promote their cause, it begs us to ask: what will happen to bitcoin now?

The answer: not much,  as you have to bear in mind that the Bitcoin Foundation and Mt.Gox are not bitcoin, but operators around the markets of bitcoin.  It would be like saying that because the US tourism agency and Washington Mutual fail, that the US dollar would disappear.  They are not the same things, and bitcoin will continue to develop regardless of these headlines.

Meanwhile, some have pointed out that the failure of the Foundation may be more to do with being unlucky or stupid, than anything else.  After all, the Bitcoin Foundation had $4.7 million of net assets at the end of 2013, but these were mainly in the form of bitcoins valued at $900 each.  A year later, the value of bitcoin had tanked to $250 each, wiping out almost 75% of the value of their asset base.  Meanwhile, expenses were around $1.47 million whilst revenues were less than one million.  In other words, the Bitcoin Foundation was created during a rapid growth in the value of bitcoins and did not know how to handle the rapid loss of bitcoin value, whilst trying to sustain their operation.  That created a challenge as to how to keep going and is the reason why many people have stepped down or been let go (including our friend Jon Matonis).

Anyway, before I move on my favourite comment about all of this came from John Barrett on Cryptocoin News:

Bitcoin foundation

This is why you need a regulatory structure folks.  

The 99% will claim that with democratised transparency they can manage everything but, without structure and control, you have anarchy and abuse.  Imagine Alibaba or eBay without a central exchange to manage disputes and that’s what the 99% are lobbying to achieve.  They believe the multisig structure to arbitrate disputes will provide the appropriate controls, but I am not so sure.  In fact, these developments – Mt.Gox and the Bitcoin Foundation – demonstrate more about why you need independent governance to make monetary systems work as, without it, you have a complete mess.

Talking of which, banks have become far more vocal and articulate about bitcoin or, rather, the blockchain of recent days.  In January, USAA, NYSE and BBVA invested in these technologies ($75m in Coinbase), with two quotes catching my eye:

“At its core, Bitcoin is a decentralized protocol that enables exchange of value among parties around the world, giving it the potential to alter the financial services landscape,” Jay Reinemann, BBVA Ventures executive director; and

The Bitcoin blockchain “is an opportunity for Wall Street to streamline some operations that are pretty antiquated”, Duncan Niederauer, former CEO of NYSE Euronext 

It’s not surprising that these statements are being made when even the regulator gets it:

“The price of handling bits [of data] has come down by a factor of 10,000 fold over the last generation; it’s high time that the costs of payments processing fall by a factor of even two.  Bitcoin offers the prospect of necessary and important disruption in finance for the benefit of buyers and sellers rather than financiers and middlemen.”  Lawrence H. Summers, former U.S. Treasury Secretary

Maybe the latter quote is the reason why the US Fed is creating their own cryptocurrency with IBM.

All in all, we are seeing the natural development of order in the cryptocurrency community where the unregulated markets of exchange (Mt.Gox) go through a trough of disillusionment as even their leadership cannot function effectively (the Bitcoin Foundation), whilst the traditional order things (governments) wake up to see how they can make this work effectively (via the banking system).

Watch our weekly interviews closely as we’ll have more on this coming up soon.

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