I attended a great meeting in Austria with Google yesterday. There were a number of Google Vision presentations and discussions, along with nice vignettes from Accenture and Raiffeisen Bank. One slide particularly caught my attention, as I’ve just started to see a cycle in fintech, and this slide from Google’s creative evangelist (really?) Jeremy Abbett appeared onscreen:
What it shows is that digitalization eventually hits markets. When the technology is ripe, it disrupts those markets. Typically, it means that markets lose value and become near-free. In other words, the technology rips out the profit and demonetizes everything. Finally, free markets are in play, as the business model is democratized.
He illustrates this with the usual suspects: music, film, entertainment, travel, and so on. In particular, we had the Kodak moment of technology created that makes picture-taking free. Music adapted but streaming means that it’s now tiny subscription-based services: who buys music anymore? Even entertainment is being turned on its head as Netflix loses its film library and Amazon Prime pays top dollar for Top Gear.
I like the concept, though I can see some flaws when we apply this to banking. What this cycle should mean, if banking was like every other industry, is that technology is attacking the physical structure of banks and stripping the business model to pieces. It is.
The follow-on is that the margin in the traditional bank business model is then ripped away by startups. It is. Just look at P2P or payments to see that the products banks traditionally used to make margin are no longer viable.
Yet, democratization of banking isn’t happening. This strikes to the heart of the libertarian dream: that banks and third parties can be removed from the value chain. They aren’t. It keeps coming back to the law and government licenses, which gives banks breathing space to adapt their models to the fintech disruption. (If you don’t believe this, read this extract from The New Yorker. It’s hilarious.)
So, my view of the world is that there is another cycle in play, called the risk cycle. This cycle is similar to Jeremy’s, but subtly different:
To begin with, we see massive innovation in play that leads to disruption and new business models (the first two stages of Jeremy’s cycle). As these new companies emerge to tackle the incumbents, however, they create risk. Several of these new firms go bankrupt or work around the tight regulatory controls in place. As governments and policymakers realize what’s in play, they then work fast to fill the gaps in their law-making structures. Think MtGox and Silk Road, but also think Uber. Uber is in that third cycle right now, as the incumbents fight back through the legal and regulatory system to shut them down, or at least make them look more like the incumbents, with the same duties and responsibilities.
This is the dialogue most banks are having right now: how to make the upstarts behave within the same constraints as the incumbents. This leads to a new level of compliance that’s different to, but just as onerous as, preexisting market constraints. Then, of course, new players start to see gaps in the regulatory armor and begin to innovate again.
I like these two charts as they’re brothers-in-arms. The difference being that you cannot democratize a tightly regulated market, but can only do this in markets that don’t matter to lawmakers.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article here.