07 Jun 2017
It’s a line usually attributed to Bill Gates but it may have been Ed Furash who said it first. Whoever, the point is true: banking is essential to a modern economy. But banks are not.
That is, modern economies require a way of connecting borrowers and lenders; of making secure payments; and of what’s called ‘maturity transformation’ – where lenders get access to their money at short notice but borrowers can have funds for a longer term.
Traditionally banks have performed these roles but such institutions are not, as Gates and Furash said, essential. Markets can connect borrowers and lenders; non-banks can facilitate payments; there are other models for maturity transformation.
"Do banks still have an enduring competitive advantage of any significant kind?” - Andrew Cornell
Do banks still have an enduring competitive advantage of any significant kind? They should.
Threats to banks have come and gone in the past – indeed Gates made his comment in 1994 at a time when Microsoft looked like it might compete directly with banks. Today there are hoards of disruptors entering banking, notably the financial technology start-ups, fintechs.
But fintechs are unlikely to displace banks. As the hype of the equivalent of an Airbnb or Uber of banking recedes fintechs look more and more likely to partner with banks.
That’s essentially because fintechs, while they have innovative solutions, don’t have scale – of capital, of data, of customers.
Except for Amazon. And Google. Or Netflix. Or Facebook. The so-called “FANGs”. While many start-ups tried and so far failed to become UberBank or the AirBnB of B2B, Amazon is already Amazon. Google is already Google. Facebook is already Facebook.
They are not fintechs or start-ups but they have the disruptive capacity. They have the scale in capital, data and customers. And they are already worth more than any banks in the world.
The online (and sometimes physical) behemoth which strikes fear into retailers everywhere has actually dabbled in financial services for a while.
Now Amazon has announced plans to expand its lending to small businesses in the US, the UK and Japan, in a direct challenge to the banking industry.
Lending is available to merchants using Amazon’s platform – and about whom Amazon already has extremely detailed data on cash flows and sales histories. Such information, traditionally the province of “relationship” banks, is incredibly valuable in reducing risk.
Facebook too already has a huge commerce operation while Chinese e-commerce giants Alibaba and Tencent manage the complete sales and finance chain for users.
Business leaders and commentators are right in that the competition of the future is less likely to come from peers than from other industries. Alistair Milne from Loughborough University in the UK presented a fascinating paper recently for the Australian Centre for Financial Services Research Program called “When Google buys MasterCard”.
Milne’s argument is if Google bought MasterCard it would add a final link – and a valuable one - in the value chain between buyers and sellers (eBay did for a while own PayPal although PayPal piggy-backed off incumbent payments systems like MasterCard).
So one scenario Milne can see is where a giant platform such as Google buys an established payments platform such as MasterCard. Just like when Gates was looking at banking two decades ago, the combination would essentially offer banking services for next to nothing.
The ‘mega provider’ could offer communication, social media, a virtual market place and financial services.
Nor is this the only sort of hybridisation possible. My former colleague Chris Joye has argued the future for a struggling media company like Fairfax should be more “banking services”, replacing the cross subsidy from classified advertising which used to support its journalism with new revenue.
Joye notes Fairfax is already essentially a real-estate marketing company via its Domain business but that should be extended to encompass what he calls a ‘financial Amazon’. His idea is a wealth equivalent of Domain “with transaction processing plugged-in: a singular listings site where you can review all home loans, deposits, super funds, shares and so on.
Unlike RateCity or Mozo, this will not be merely a ratings business that sends you away to a company's site … it will become the central sales hub for all financial products, stealing distribution power away from its bricks and mortar rivals (ie, branches and brokers).”
It’s an interesting and theoretically appealing idea however it’s unlikely to pose an existential threat to the banking industry even if it is attempted and works. The FANGs have bigger teeth.
So the question becomes what do banks have they don’t? Perhaps ironically, given the financial crisis and ongoing political and public opprobrium, it is trust.
People trust banks with their personal and private data. Increasingly, they are losing trust in the emerging and emerged technology giants who gather vast amounts of data and use it in ways incomprehensible to the individuals whose data it is.
Financial services commentator Chris Skinner explored this idea recently in his blog The Finanser but it is an idea that’s been considered before – particularly given “trust” is a foundational commodity of banking, dating back half a millennia.
Skinner asked whether banks could be “the consumers’ data champion?” The question revolves around the idea the giant platforms give us searches, email, storage and more for free “on the basis that we allow them to mine and use our data”.
“They claim that they won’t be evil, but are they using our data ethically and is all above board?” he notes.
“Here’s the idea: banks are trusted stores of data about money, because they are insured and have a licence to operate from governments. If the bank started to monetise our data on our behalf and give it back to us, wouldn’t that make a difference?
“Now I don’t buy into this whole idea – where will searches take place if Google disappears (Bing?) – but I can see that there is and always has been a potential for banks to do more with data. In fact, we talked about ‘infomediaries’ 20 years ago, where we would delegate our digital lives to information agents with artificial intelligence who would do everything on our behalf.”
Skinner believes for banks to capitalise on this potential to evolve their history and become trusted data agents, they would need to become more integrated into the open data world.
That however is a double edged sword: to the extent some banks are resisting the drive to open up a customers’ data – on the basis the customer owns it – they are worried both about a direct loss of competitive advantage and potential collateral damage from being blamed for something that goes wrong when a third party does have access to the data.
In Australia there is a further complication, particularly in the current political climate, of customers’ deep-rooted ambivalence about banks. Publicly, they are loathed and mistrusted as an industry, privately customers have a very high level of trust in their own bank.
For example, according to internal polling by the industry, most Australians believe their own bank treats them at least adequately but don’t treat the disadvantaged well. However the disadvantaged – for example aged pensioners and those on lower incomes – believe they are treated reasonably well.
Moreover, as the latest Edelman Trust Barometer shows, there has been a global collapse in trust in institutions – including business, the government and the media – of which banks are one part.
Nevertheless, people by and large still believe their money, their financial affairs and their data is safe with their bank. And that is an asset.
Andrew Cornell is Managing Editor at bluenotes
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
07 Jun 2017
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