Banking Fintech

Financial technology – do we really need to rip up the roads?

Financial technology – do we really need to rip up the roads? Photo: Dmitry Kalinovsky,
Written by Chris Skinner

The advance of technology doesn’t mean everything changes for financial services overnight, or does it? Chris Skinner explains.

In a discussion yesterday, I made a comment that resonated. It was in comparing fintech with transportation, and the idea that just because fintech comes up with the idea of a self-driving car doesn’t mean that we have to rip up the roads, does it? No. The transportation system has a huge amount of infrastructure in place already, from major roads and highways to railways and airports. Just because technology reinvents the idea of a car, train or airplane doesn’t mean that we need to reconstruct the whole highway, railway and airport infrastructure. They just run on the existing infrastructure in a more effective manner. It’s then down to the existing manufacturers of cars, trains and planes to work out if they can keep up with the innovations the new players are bringing to market.

That’s why GM, Ford and BMW are talking all the time about the threat of Tesla, Google and Apple. As self-driving cars take over the market, they’re all scrambling to keep up and see if they can also offer a decent version with all the bells and whistles.

Take that back to fintech, and most fintech firms are creating new versions of payments, transactions, value exchange and value store. Some are very specific and some are highly innovative, but none of them are making us rip up the roads. In fact, nearly all are running on the roads, railways and airports that were built by the banking system. They may be forcing the banks to upgrade those systems, as in the distributed ledger projects under way in clearing and settlement and payments, but a radical reconstruction and rebuild of the whole network is unnecessary.

No customers, no track record

In fact, when I look at fintech firms, they fall into a range of categories. Most are supplementing the existing financial system by making the things that work badly easier, vis-à-vis merchant checkout online via Stripe, or paying friends for small transactions via Venmo, or reaching parts of the world that the banks cannot reach, vis-à-vis Square for small businesses or M-Pesa and mobile wallets in Sub-Saharan Africa.

Where banks have core business, the fintech startups struggle. In fact, there was a great report on Bloomberg yesterday, which made the contention that any challenger bank will struggle. The fact that they have no customers, no track record and no capital is the issue. If they get over these challenges and gain some market share, they’ll just get bought by a major incumbent such as BBVA.

OK, so it’s not as simple as that, and people like to point out that banks are struggling. Deutsche Bank and Wells Fargo are the latest to be laughed at. RBS, Northern Rock, Wachovia and Washington Mutual are previous failures. But these are failures of management, not of technology strategy. Therefore, I take exception to those who think that bank failures are because of fintech. Not a single incumbent is failing because of a startup, and no startup has succeeded in overthrowing the incumbents’ position of strength so far.

The incumbents own the roads, build the cars and maintain the network. There may be new cars and new ways of running the network emerging, and the incumbents’ challenge is to keep up with the changes. However, the idea that the changes will cause them to rip up the roads, ditch their customers, fail to react and just throw themselves over the cliff to their doom is a fallacy.

Of course we need to rip up the roads!

I often write some things that I don’t believe, such as the fact that we don’t need to rip up the roads (see above). Of course we need to rip up the roads, because our mode of transport has changed dramatically. A great example of this change is just the very nature of the underlying transport architecture we’re using.

Historically, our technology architecture has been based on heavily controlled programme structures. In the 1990s, we moved into structures based on modular computing, object-orientation and Service Oriented Architectures (SOA). Today, we live in a world of plug-and-play APIs and open marketplaces. The structures are very different, though there are similarities.

The 1990s object-oriented developments were designed to develop plug-and-play functionality internally. Today’s open APIs are designed to develop plug-and-play functionality externally. That’s a difference in focus, which means we can redesign the roads with agility through open marketplaces and crowdsourced developments.

READ NEXT: Why it’s so difficult to compete with incumbent banks

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo: Dmitry Kalinovsky,

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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