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Time to Face the Music On Disintermediation

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The music industry attracts a hip crowd, but its decline in the face of digital innovations is one trend no one else should want to follow. And yet that's the direction the bank industry is headed in, because in spite of all the regulation that helps prop up legacy business models and protect established companies, much of banking is ripe for digital disintermediation-and it's starting to happen already.

Fundamentally, banks connect those with money to those who need it. By limiting access to the systems that handle the transactions, banks have been able to charge big fees. But the walls are breaking down now, just like they did in the music business.

Piracy didn't kill the music industry. What killed it were newfound digital conveniences and the sharp decline in the value of a hit song from the approximate $15.99 price of an album to the 99-cent price of a single track. In 2010, U.S. recording companies sold 83 million digital albums and 1.2 billion digital songs for a total of $2.2 billion in sales from downloads, according to industry figures. The rough math suggests that if consumers still had to purchase music by the album instead of by the song, digital downloads would have brought in $12.8 billion-nearly six times actual revenue.

But cost isn't even the main issue. If it was, you wouldn't have $2.2 billion in digital sales, because everyone would be using illegal file sharing services. What iTunes-type businesses and music subscription services give consumers is convenience. It's easier to get music legally than it is to pirate it or to buy and rip a CD.

Similarly in banking, alternative services are sprouting up that make transactions easier and cheaper. Here's a taste: Square enables anyone with an iPhone, iPad or Android device to accept major credit cards through a reader that plugs into the headphone jack-and it costs just 2.75 percent of each transaction. Dwolla circumvents cards all together, letting users send "cash" to each other and to Dwolla-registered businesses via email, phone, Twitter or Facebook. Recipients pay 25 cents for any transaction over $10.

A service called Simple offers a digital banking experience that's so well-designed it puts most bank websites and apps to shame. It also provides fee-free basic banking services. Second Market provides an electronic trading system and market structure for historically hard-to-access alternative investments, providing new financing opportunities to private companies and new opportunities for qualified investors, circumventing commercial loans and Wall Street. Klarna pushes credit cards out of the online shopping equation. It lets shoppers make purchases using information like their birthday. Klarna pays the merchant; the shopper eventually pays Klarna. Merchants pay fees of around 1.5 to 2.5 percent. AngelList, meanwhile, connects startups to reputable investors; and Kickstarter connects creative people with those who want to fund them.

All of these examples use software to replace traditional, profitable banking services-and there are many more startups like them. They're technologically and legally feasible, and there's serious consumer demand for their services.

Some banks recognize the threat and have responded by creating their own user-friendly digital services-unlike the music business that fought change, they're embracing it. Chase, for example, is meeting consumer expectations through QuickDeposit, which facilitates ATM- and teller-free deposits, and QuickPay, which allows Chase customers to send money to friends, even those who aren't Chase customers. American Express is innovating through Serve, another example of a digital platform that allows users to send and receive money. What's more, the company set aside $100 million to fund what would have been its competition: digital commerce startups. They're betting the classic banking industry is getting disrupted, democratized and maybe even decimated-and they're literally putting their money on it.

Shapiro is the CEO of the digital agency HUGE and author of the book "Users Not Customers."

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