Why banking industry is changing

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The music industry used to be dominated by record labels and distributors. Then Spotify came. Record distributors were made redundant and main-street mega record stores and the cool boutiques around the corner gradually realized happy times were over. To grandparents looking for Christmas gifts these stores are a rare find today as consumers have gone online.

Countless of industries started as small businesses, gradually growing to become given infrastructures of modern society. With size and brand came new products and new customers. The business models have been based on a few key factors; scale, a proprietary technical infrastructure, a brand and distribution channels.

Technical infrastructure and distribution channels are both being challenged by new peer-to-peer internet protocol technologies, IP, bypassing industry-giants and their 100-year old oligopolies. Internet has not only made information transparent, equally important it also allows communication between different persons and businesses. Suddenly a new breed of entrepreneurs and companies challenge the traditional way of making businesses with local and multinational intermediary companies.

File-sharing was an early adoption of the new technology. Companies like Napster and Kazaa was created by enthusiasts to allow sharing of music and film. That was early days. Multinational giants effectively stopped these annoying newcomers with armies of lawyers and expensive law suits. The Millennium years’ were vintage days for today’s digital entrepreneurs.

Using IP to advance industries resemblance the early days of globalization in the 1970-80’s where the new multinationals challenged respected but local industries and production facilities. Or like the early days of deregulation and increased cross-border trade in the 1990’s and 2000’s where previous state controlled enterprises suddenly were expected to compete on open markets, whether that would be airlines, telecom or utilities. These moments of industrial history was transformational with great impact on business models of those days.

The telecom industry started locally and later expanded on national levels connecting switchboards and telephones. Alexander Bell patented the telephone already 1876 and the industry thrived the next 100 years with copper lines connecting cities and countries.

The telephone became common at every home and important corporate executives typically had 2-3 desktop telephones on their desks. Later those were exchanged for larger desktop models with multiple quick-call bottoms to colleagues. The ultimate symbol of importance.

Mobile phones were invented and the industry was deregulated to allow for new entrants and much needed investments in new technology. Century-old state-controlled enterprises were privatized and government agencies were auctioning licenses for mobile traffic to highest bidders at the costs of billions. Buss-words of the days were mobile and the second major new technology; fiber-optics, that suddenly made data traffic accessible to the masses.

By nature, ground-breaking innovation is challenging at any large and mature corporate. The risks are high, to decision-makers, to individual careers and to shareholders. Intra-company allocation of resources is a tough process were politics and ambitions meet harsh reality of short-term financial targets, much needed maintenance investments and, if funding allowed, R&D and growth projects close to core competence.

As with Spotify taking music consumers online making powerful record labels, distributors and retail-chains redundant in the process, no one in the global telecom industry saw Skype and other IP-based service providers coming. To invent such a different business model would have been difficult to any mature industry and large-corp.

Skype’s solution is being built on peer-to-peer technology over internet were voice communication do not need to pass-through privately controlled intermediary switchboard solutions at various telecom companies. The technology contains three types of entities; super-nodes, ordinary nodes and a login server. Each customer maintains a host cache with the IP address and port number of the reachable super-nodes. The user directory is decentralized and distributed among the super-nodes in the network. Skype, the company provide access to the technology through client licensing. Once purchasing a license, or using an entry-level free wee license, customer can call any other licensed customer, regardless where he is located in the globe.

This new distributed network technology has taken a dramatic shift forcing telecom giants to build their own IP-based telecom services and/or re-sale Skype licenses. Old copper networks and the newer fiber networks are still highly desirable businesses being much needed infrastructure to internet and IP-based businesses. But the ambitions of national and regional telecom giants to become content suppliers took a dramatic turn with the entry of innovative newcomers like Skype and Spotify using different forms of peer-to-peer technologies scalable on a global basis. Large national and regional telecom giants has been forced to re-focus their own business development on core infrastructure in their respective part of the world. Desirable, profitable but maybe less sexy compared to new content suppliers.

Peer-to-peer technologies and business models scalable on a supra-regional and global basis has come to stay and will continue to challenge. In some industries, beyond music and telecom, it is still early days.

Über is the taxi company with no taxis. They use another technological architecture than Skype and Spotify but the business model remains the same. Customers and drivers are connected to each other without any need of local intermediary taxi service companies. It’s a peer-to-peer business model. Already today Über has little less than 15.000 connected cab drivers in New York City alone, compared with litte more than 14.000 ordinary yellow cabs. This time Über is the intermediary but the difference from all those local taxi companies around the world is that Über use a relatively simple IP-based technology to connect a customer to a driver. The marginal cost and marginal technology adjustments to different markets is extremely low and hence the business model is scalable far beyond any old-school taxi company’s capability.

The second oldest of professions is also at the tipping point of dramatic business model changes – banking. New super trends challenge the traditional branch and relationship banking model where bank clerks and executives has hold the upper hand towards customers. Traditionally banking products has been seen as desirable but highly complexed, expensive and provided by well-paid bankers. To corporates those bankers also had monopoly on cross-border transactions through their correspondent banking relationships. A mythical world of wealth and well-suited bank executives.

All that is about to change. The three super-trends leading the way are deregulation, transparency and technology. None of those are core to senior bank executives rapidly trying to grasp these changes, far from traditional competences such as treasury management, credit processes and client meetings.

As with the telecom industry before banking, large banks have similar structural resistance to innovation and transformational change although much has now been learnt from industries before banking.

The three super-trends:

  • Deregulation means standardization and the death of complex product descriptions and fancy financial structures. Standardization also means lower entry barriers for new-comers and margin pressure, all within the interest of the consumers.
  • Transparency comes with the information age, online news and forums and with social media sharing as well as price and service comparisons. The knowledge power is suddenly being shared between well-paid bank executives and the average Joe.
  • Technology being the third super-trend effecting banks and their current infrastructure include early adoptions like mobile apps for banking, yet to be proven technology like artificial intelligence advisory tools through smart algorithms and blockchain technology to settle transactions without the need of some of the proprietary intermediary banks and intra-bank relationships.

What these three trends have in common is a fundamental change to the way we have learn to view banking, and hence a need for change of banks current business models. Products and services is gradually being commoditized meaning other values like brand, service, accessibility and packing will be important to consumers. In addition to the banks themselves, automation or digitalization as it is now called including end-to-end product and process standardization and streamlining will be important.

Banking will become increasingly peer-to-peer based with highly commoditized underlying products in everything from financial advisory to FX and trade finance transaction to savings and lending. The incumbent banks have great challenge with regards to brand, customer perception and to truly and with internal culture adopt to these super-trends. At the same time they are well positioned with current banking infrastructures and customer relationships.

Quite similar to the telecom industries some 10-15 years ago. The second oldest of professions is changing, as well.

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