Apr 13, 2015

By Brett King

The debate on the future of banking is not over, but it will be soon

How does one predict the future? Admittedly it is easier to predict what will happen 5 or 10 years from now, than 50 years, but at the same time, we’ve got trouble predicting what the stock market or weather patterns will do a few weeks from now, let alone the banking system. However, when we look at long-term trends a few things are abundantly clear.

  • Computers are getting cheaper, faster and smaller
  • Adoption of technology in all works of life is speeding up, most recently mobile, but soon wearables
  • Experiences are rapidly changing as technology is injected
  • There is a constant disruption of traditional business models
  • Machine Intelligence is coming


In preparation for my next book Augmented I studied disruption that has taken place over the last 250 years. In those 250 years, no single industry has ever, I repeat ever, survived technology disruption unscathed. In every single instance the incumbent players have been displaced by those who have the better grip on the new paradigms. In some instances the incumbents survive, but they no longer dominate.

There’s been much debate over the last week on whether or not FinTech will disrupt banking, or whether banking can survive through iteration and compete.


In Jaime Dimon’s letter to shareholders last week he warned “Silicon Valley is coming”. In his letter Dimon warned “There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking”. Dimon was concerned enough to flag this and he cited the inability of banks like Chase to be able to reduce time on loan approvals as an example of where start-ups had the advantage. The conclusion – big banks like Chase have to change fast or partner with start-ups to retain relevance.

Dimon sees it coming. The battle against FinTech start-ups for banking is not in products or features, it is not in a new skin on an old model – it is in rethinking the fundamentals.

Let’s say a bank like Chase commits to changing their approvals on loans at the executive committee level – what has to happen?

Legal and compliance have to approve the change. A new process must be designed to enable say mobile, real-time loan approval. New risk systems must be developed. The core system probably has to be replaced. That’s even before we worry about what the experience is going to be or look like – whether it is an app, an embedded experience, or similar.


For Lending Club, they don’t have these constraints. They model new behavior, design a new system from the ground up and go. Their funding, speed and lack of legacy constraints means they can do it much faster than the incumbent. Hence why LendingClub was the 4th largest tech IPO in history, and Chase, HSBC, BofA and Wells all still require days or longer to approve a loan today.




You might argue this is immaterial, that LendingClub has only taken a fraction of the lending market in the US, and that it is not a long-term threat to Chase – that’s not what Dimon thinks. The issue is, it is only under the crucible of the market and pressure from FinTech start-ups that banks like Chase finally are feeling the need to change, and then admittedly that change will be complex, expensive and lengthy.


Every FinTech start-up, and there are thousands of them, have bet the farm on their idea. The number of banks, wealth managers and insurers that have a sizeable innovation fund for investing in FinTech? A handful. The number of banks, wealth managers and insurers that have built an independent brand or business unit that is not constrained by legacy systems or metrics so that it can truly innovate? Less than 20 globally, amongst more than 1 million banks, hundreds of thousands of insurers and millions of advisory firms globally.

Let’s look at payments. Who are innovating payments today? M-Pesa, PayPal, Apple Pay, Bitcoin, Venmo, Dwolla, and others. Not one bank globally has led the charge on payments disruption, which is why banks in the US have been forced to jump onboard the Apple bandwagon despite the interchange penalties.  Everyone knew that mobile payments were coming, but banks wanted to wait and see what the ROI would be, what the regulators would say – tech and start-ups just did it.


At the heart of the Financial Services industry is an aversion to risk. While banks are reasonably profitable as a whole, investing billions of dollars in uncertain outcomes is not their modus operandi, but it is for Silicon Valley players and the thousands of other start-ups around the world, as it is for Apple, Google, Microsoft and the technology sector.


Who will dominate?

Within 10 years the fastest growing banks around the world will be technology companies, not banks. The fastest growing brands in banking will be those that have taken just one single slice of the universal banking model and optimized it, creating a compelling real-time experience – they won’t be businesses that own a charter. Many of these will need to partner with banks who do the boring compliance stuff, but increasingly even the choice of those bank partners will be driven by their technical competency to work with a start-up.

In the end this is a numbers game. When it comes to disrupting an industry like banking, no other industry in the last 250 years has faced as much competition from new entrants split across product lines than banking is facing today. The idea of bundled universal banking is one that cannot survive technology disruption. Why? Because getting an instant loan is just one of dozens and dozens of experiences that are currently being unbundled and optimized by FinTech start-ups, and customer behavior is unreservedly shifting towards cherry-picking optimized services – not bundled, banking services. What LendingClub, Betterment, ApplePay, Moven and others are teaching us is that banks are not the best in the world at Lending, Investment, Payments or Bank Accounts.


Here’s what startups have going for them:

  • Well funded
  • Unconstrained by traditional thinking
  • No legal or compliance constraints – such issues relegated to ‘design inputs’
  • Myopic focus on one experience area
  • Better able to attract technical talent
  • Better at experience design
  • Sheer numbers
  • No legacy base
  • Start-up culture


Here’s what banks have going against them:

  • Slow to fund
  • Constrained by ‘universal banking’ model
  • Tremendous compliance/legal inertia design to prevent change
  • Focused on hundreds or thousands of ‘products’
  • Losing key talent to start-ups
  • Focused on features and channels, rarely on experience
  • They don’t see the wave of FinTech challengers coming
  • Tons of legacy issues
  • Culture of risk aversion – anything new is risky


The first banks to be victims of this will likely be the largest banks of the 80s and 90s who have just missed the boat on digital transformation, or the smaller regional and community players who just can not invest adequately to stay relevant. However, even those that truly wish to transform, will still find it difficult to break out of their current experience sets, their product processes and legacy constraints. It is here where start-ups unabashedly have a huge, unassailable advantage.

Some banks will survive, that is not at dispute. The back-end around regulation and the requirements for KYC will take longer to shift than the front-end. In the meantime, however, the banking industry as a whole will be turned on its head. Banking as it is today, will likely survive for some decades in limited numbers, but the players that own the day-to-day banking experience in 10 years won’t be banks, they’ll be new players. They’ll be 30 or 40 “unicorns” worth Billions of dollars each that are focused on one or two incredible experiences end to end.


Here’s where the macro futurist view is absolutely critical – This is not about product,  processes,  features, or channels – but a money or banking experience embedded in your life through technology. This is where the next 10 years is taking us fast – embedded experiences provided by technology. Those experiences are best unbundled. Sorry Michal Panowicz, that’s what I think you’re missing in this debate.

mBank has done well with their approach to digital, but haven't fundamentally iterated basic product/channel model with experiences

mBank has done well with their approach to digital, but haven’t fundamentally iterated basic product/channel model with experiences


Banks as a whole can’t get past products, processes, features and channels. While a handful will survive because they have bred a culture of adaptability, they won’t thrive until they voluntarily break apart their current structures to build compelling experiences, and that is the rub – there’s not a bank in the world today that is thinking about investing in the future in that way – independently branded experiences. But there are 45,000 FinTech start-ups that are.

The future is a numbers game; one that banks on a whole can not win because most haven’t even started to play. Banks won’t cease to exist, but the banking experience of today will.

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