The Bankwatch

Tracking the consumer evolution of financial services

The true meaning of innovation in financial services lies in the plumbing, not UI

This piece on internet and evolution of financial services has the best quote I have seen for some time.

“these companies have merely built nice UI’s to Wall Street”

How To Disrupt Wall Street | The Business Insider

As I see it, these companies have merely built nice UI’s to Wall Street: Mint connects to your banks and Square to Visa and Mastercard and the bank that issued the credit card. If people at farmers’ markets use credit cards instead of cash, that means more money for Wall Street, not less.

Brilliant. I take no issue with the likes of Mint, and Square which are nice new innovations. which may well result in big changes later. However they are hardly game changing today. Game changing would mean that in 20 years time we might see future headlines such as:

  • Headlines – 2030
  • bank branches are no longer ….
  • banks have largely been replaced by ….
  • customers obtain financial services today from ….
  • Hedge funds have replaced …..
  • A new type of investment fund has …..

In order for such headlines to appear new sets of new companies will be needed, but more importantly companies that are based on dramatic shifts and simplicity in how money moves around. Money moves today amongst people and banks in a certain way today. This is the plumbing of banking. Payments networks, clearing systems and ATM networks are how money moves around. Mint for example does nothing to change that. In fact arguably Mint makes banks stronger by providing new reasons to stay with the current bank because the functionality Mint offers is based on access to existing plumbing.

The financial systems that comprise the plumbing and the operators who sit over the plumbing such as Banks, aggregators (eg Yodlee, Cashedge), Card companies (eg Visa, MasterCard), all serve to actually increase the complexity and also the probably, the cost of moving money around. More players means more competition, and it also means more aggregate costs in the system. For consumers they must beware new sets of fees which in total increase the overall costs of their financial services.

Let us not forget that one of the causes of the financial crisis of 2008 was the lack of transparency embedded in the financial products that served the securitization markets. Those markets remain, and the methodologies have yet to be re-invented. Government regulation will not fix that problem.

For me true innovation will only occur when plumbing changes. Despite the recession the world is awash in cash, seeking better returns, yet the ‘system’ generates very very low real returns on cash investments when compared to the interest rates which are paid by people on loans, credit cards and to a lessor extent mortgages. The interest rate differential between that paid, and that earned is being eaten up by more and more players. This has resulted in a shift to more and more fees because the interest spreads just don’t offer enough return to fund the ‘system’. This is a snowball effect that can never be good for people. Forget about bank bonuses. Those are asymptomatic of an inefficient system that is driven by driving people harder and paying them with large bonuses to make an inefficient system work by creating ways to hide the inefficiency – lipstick on a pig. Bonuses are just one element of cost in an inefficient system.

Thus true innovation can only occur when we see elements of plumbing removed, costs removed, and money able to move between people with less steps and costs thus eliminated. Included in the plumbing are banks and their systems, payment networks and their systems, card providers and their systems, and unfortunately this includes the new UI providers referred to in the article above.

When we see players changing plumbing such that existing systems are bypassed, and made no longer relevant to a transaction, we will have innovation. When that happens players will change and eventually be eliminated, and those headlines may begin to appear.

Written by Colin Henderson

January 23, 2010 at 20:18

7 Responses

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  1. Innovations always going to start with distribution and reporting.

    There are some firms like (who will be at BarCampBankLondon5 in London this Sat, book now!) who are starting to do their own plumbing now.

    The nice thing about being a tech firm, rather than an intermediary, is that you don’t need to put up your own capital if you’re open. BetFair never had to put up millions for market making; they had an API and other people did it for them. (You also aren’t tied to anarchic infrastructure from the 80s.)

    Thomas Barker

    January 24, 2010 at 08:34

  2. True innovation is hard to envision within today’s banking eco system. Banks are largely disinterested in changing their business models and risking revenue streams; technology companies may have the vision but will lack customers, thus sidelining many of the potential innovations.

    “Creative Destruction” is long due in the financial services arena, and more specifically, the Banking segment. However, this will need to be forced onto the industry by new entrants. Mint, Wasabe, etc. are marginal players (few banks will consider these entrants as a threat) today. What happens tomorrow is anyone’s guess…

    What needs to be deployed is true disruption that solves problems for bank customers without consideration of “boundaries” established by banks, brokerages, insurance companies, etc..

    Serge Milman

    January 24, 2010 at 16:07

  3. Thanks Thomas/ Serge. The theme you both raise is that the change will not come from within the banking industry, and I must agree.

    Colin Henderson

    January 24, 2010 at 17:31

  4. The current financial plumbing will probably never be replaced, no matter how legacy it is. The cost to replace it would be astronomical. The issue is what they call in long distance “the last mile”. Which in financial world is POS. To bypass the current plumbing is either a internet solution or a wireless solution. Both have inherent issues and would also require a lot of capital waiting for adoption.

    I think that the best solution is to make the change from within. Payment networks need to understand that is all they are…networks. When they finally understand that their function is only to transmit tractions messages from POS to an authorization location, it will allow the needed changes to happen. It happened in long distance when AT&T realized that it made more profit renting the network to other carriers than it did using it just for their customers, after that changes happened pretty quickly.

    It only takes one network, then it will domino across all the networks. Then things will start happening with new innovations. But until new plumbing is installed or the current plumbing becomes open access, all the truly amazing innovation in payments will sit on the sidelines. Mobile payments do not bypass the current system, sooner or later it has to go through the current system. A new mobile UI is not really new innovation.

    Thanks, Phillip Huston

    Phillip Huston

    January 28, 2010 at 14:17

  5. Philip .. thanks for stopping by an commenting. It sounds kind of bleak but I hope there are some of the innovations that you touch on that might come to fruition. As you say it would only take one.

    Colin Henderson

    January 29, 2010 at 15:09

  6. There are some huge innovative possibilities available now though the messaging and switch systems, the plumbing. The problem is the lack of foresight and the huge monoliths that at this point don’t have to evolve. Just think along these lines. With every transaction there is enough room to ‘envelope’ other data that could be used to manage, innovate and create greater content and valuable usage. But few want to step out of the box. Great post Colin.


    January 31, 2010 at 11:47

  7. You are right about the monoliths and not needing to change. It will require external pressure somehow.

    Colin Henderson

    January 31, 2010 at 20:20

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