The question isn’t whether banks are responding to change in the banking system, but whether they’ve actually recognised the need to change. Chris Skinner talks about adapting to change, mobile wallets and the rising, new financial system.

I’ve blogged quite a bit about adapting to change lately, and will continue to do so because banking-as-usual (BAU) is not an option. It’s similar to standing in the middle of the road: If you stand there for long enough, you’ll get run over. This is as true in banking: If you stop changing, you die. Now banks know this – they’re not stupid – and have been changing a lot over the past decades. Since I started in banking, we’ve seen the mass adoption of ATMs, the introduction, growth and move to offshoring call centres, the deployment of online and now mobile banking, the rise of algorithmic, high-frequency trading, the drive towards server farms co-locating next to the stock exchanges, and the big trends towards blockchain, cloud and machine learning overall.

This is why banks are as strong today as they’ve ever been, and I think that anyone who says that banks don’t change or are doomed is an idiot. They’re not doomed unless they stop adapting to change, and so far banks have done a pretty good job of adapting to change.

In fact, name me one bank that has failed due to technology? I cannot think of one. Ever. I can think of many that have failed due to poor risk management, but failing due to technology is just not happening. But will it?

Well, I guess it goes back to my story of the technologist who cried disintermediation: it will only happen if a bank resists change; if a bank resists the march of time. Banks will be doomed if they resist changing legacy systems, especially those at the core.

Don’t suck

Now when I blog about getting rid of core systems, many people ping me a note saying it’s not necessary. You can build adjacent systems that suck the data out of the legacy, analyses it and use it to feed APIs and apps. In other words, you build middleware to reach into the graves of the old data processing systems and suck out their knowledge. I personally don’t think this is an advisable approach to a long-term future, as sucking the data out of the dead isn’t really a viable strategy for the next century, is it?

No. Admit those old systems are dead and replace them. This is the only way to avoid being doomed.

Then another thing pops into the radar, which is the new financial system. In fact, I think there are two financial systems out there today:

  1. The banking for the banked.
  2. The mobile wallet for the unbanked.

This is the possible future world. The mobile wallet looks inoffensive and, for some, irrelevant. M-Pesa and Alipay and suchlike are for the poor and excluded, while banking serves the wealthy and the most profitable.

Now this is where I think we may see the end of traditional retail banking as we know it, because there’s a rising, new financial system that currently complements (and, long-term, could replace) the old financial system. The new consumer financial system is the mobile wallet, and that mobile wallet is most successfully developed in parts of the world that were unbanked and underbanked. As a result, the mobile wallet is being developed by non-banks, and I truly believe this is the innovator’s dilemma in full action.

The innovator’s dilemma

The Innovator’s Dilemma is the book by Clayton Christensen that argues large institutions see a no-frills product that has stripped everything back to the basics, and dismiss it as irrelevant. It should really be called the incumbent’s dilemma, as the large incumbent doesn’t want to respond to a product that eradicates all of their existing profit and functionality. The heart of the dilemma is articulated by Christensen as follows:

“The reason [for why great companies failed] is that good management itself was the root cause. Managers played the game the way it’s supposed to be played. The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: listening to customers; tracking competitors’ actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit. These are the reasons why great firms stumbled or failed when confronted with disruptive technology change.

“Successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets. Yet, to expect the processes that accomplish those things also to do something like nurturing disruptive technologies – to focus resources on proposals that customers reject, that offer lower profit, that underperform existing technologies and can only be sold in insignificant markets– is akin to flapping one’s arms with wings strapped to them in an attempt to fly. Such expectations involve fighting some fundamental tendencies about the way successful organizations work and about how their performance is evaluated.”

So, what we see today is the mobile operators and companies such as Ant Financial developing mobile wallets that can operate across borders, globally. These mobile wallets ignore the banked, and are largely developing in Africa, India, Indonesia, China, the Philippines and other markets. They offer cheap financial inclusion, and in order to do this, offer micro loans, micro savings, easy payments and low-cost digital identification.

The thing is that if they offer all of these services, what’s to stop them upscaling? I made this comment the other day about Alipay. Right now, it’s just for Chinese citizens, but what if they put a nice, local language front-end on the app? I’d use it.

And if I can do all the things that I can do with a bank on a global mobile wallet that’s cheap and easy, why would I still need a bank? Sure, I’d need a bank for commerce, trade and investment markets, but for consumer retail banking, the innovators are already a mile down the road of taking out the banking system.

The real question is therefore not about banks responding to change in the banking system, but whether banks have recognised the real need to change. You can adapt to change for sure, but if you’re adapting to the wrong change, well then you have a problem.

In conclusion, I don’t see banks being disrupted by fintech, but I do think they may be ignoring the real innovators of the future … because they see them as irrelevant.

READ NEXT: Did mobile wallets kill the credit card?

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by lassedesignen,

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.

1 Comment

  • Chris – I agree with your view that alternative financial players like Ant Financial will have a disruptive influence in finance. Start with making payment easy, then offer more services over time. I think Amazon will be the first of the major tech companies to be successful in financial services for the same reason – big synergies with their core business, unlike Google, Facebook and the other ad-driven tech companies.

    One other point to note with regards to the unbanked. Over the next 10-20 years, the size of the global “middle class” will grow very dramatically, particularly in Asia (China, India, Indonesia) but then later in Africa. The number of people who will move from being unbanked to a profitable financial service customer will grow by more than a couple of billion people. This alone will be the single biggest reason why Asian banks will eventually overtake western banks over that timescale. Here’s more info:

    Technology will also play a major role in reducing banks’ costs of offering services and investment advice to middle class customers, so it should be a very positive time for both financial services companies and their customers.

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