Like Airlines and Pharma, Banking’s Too Big to Disrupt

There are a number of banking debates that pop up regularly, including the war on cash, the end of the branch and the death of banking. The last debate concerns two camps: incumbents and new entrants. Today’s blog post is inspired by exactly this argument between Michal Panowicz of mBank (an incumbent) and Brett King of Moven (a new entrant) on Twitter. 

Incumbents believe they can change and adapt and keep up with fast technological change. New entrants claim that incumbents have the wrong mindset and, like Kodak and Nokia, will miss the mark and disappear. 

The first camp claims to be protected by rules, regulations, compliance and high barriers to entry due to governance, gaining a bank license and dealing with complexity. The latter group claims that none of that matters, and believes they can attack specific pieces of the system with new business models based upon next technologies. 

The incumbents say that they are building new technology structures and reforming their original operation. They admit that legacy systems have been a challenge, but point out that they are being overhauled, and that most of the new tech sits on top of that structure anyway so they can build great user experiences—regardless of the form factor gaining access. 

The new entrants claim that if the core is rotten then the rest will be rotten. They say that banks are hampered by heritage, stuck in the mindsets of the past, and have no chance if they don’t destroy themselves, rebuild and start again. 

It’s a fun argument to watch, but it’s an argument that’s irrelevant. In fact, I will be so bold as to say that the discussion is meaningless. It’s a bit like the argument between a zealot and an atheist. They can talk about it until the sun sets, but they will never get an answer. 

The truth is that some startups will eat some of the banks’ lunch, whilst some incumbents will adapt and survive by changing their business models, partnering with innovative new startups and acquiring companies that cause concern. 

Moreover, history dictates that the death of banking isn’t going to happen. Most banks are 100 years old or more. Name any other industry dominated by players that have been around for a century or more. 

Airlines? Maybe. Most airlines have their roots back into the 1900s and have grown through acquisitions and mergers, just like banks. There are new players out there—Southwest, EasyJet, Ryanair—but most airlines have been around a long time. 

Grocery stores? Probably. Most have high barriers to entry—the store network and margin squeeze through volume play—and have players who have been around a long time. Wal-Mart started business in 1962, Tesco in 1919. But that doesn’t mean new players like Aldi and Lidl will fail to make an impact. 

Pharmaceuticals? Ah, now that’s a business based upon product innovation and patents, which then control the supply chain through copyright. Sounds a bit like music, but drugs are harder to copy. GlaxoSmithKline’s roots date back to 1715, and Pfizer to 1849. 

And this is where the argument of the new entrants falls down for me, as they continually compare banking to music, entertainment, film, photography and similarly digitally disrupted industries. But these are the wrong industries with which to draw comparisons, as these industries don’t have tight regulations, high barriers to entry and strong capital requirements. The only similarity is that banking, like music, entertainment and photography, can be a pure digital play. 

Banking is therefore similar to these firms. But unlike these industries, it also has many commonalities with pharma, grocery stores and airlines. These are markets with a strong store distribution footprint, tight controls and high costs of capital similar to the incumbent model of banking. 

My view is that saying some geek in a bedroom can create the Uber of banking is like saying that some nerd in a garage can create the next Pfizer. It is highly unlikely to happen, as the incumbent will have the time to adapt. They may get hurt—vis-à-vis British Airways with EasyJet and Ryanair or Tesco with Aldi. But the incumbents will find a strategy to survive and thrive in the new world, even with these threats. 

In fact, the nearest we have gotten to the Uber of banking so far is Bitcoin, as I discussed in a previous post, and banks are already adapting to that one. So let’s see who’s right or wrong in ten years: the incumbent or the new entrant? 

Chris Skinner is an author, expert and speaker on banking, finance and fintech. An earlier version of this previously appeared on his blog, Financial Services Club Blog. Follow him on Twitter @FSClub.