The Bankwatch

Tracking the consumer evolution of financial services

Thoughts on the nature of disruption of banks

I liked this post.  Felix hosted a panel at SXSW and the topic was disruption of the banking system.  The panel comprised:

  1. Sean Harper from Fee Fighters
  2. Noah Breslow from On Deck Capital
  3. Shamir Karkal from Bank Simple
  4. Suresh Ramamurthi actually went and bought a tiny bank in Kansas

Disrupting the banking system | Felix Salmon Reuters

All four of these companies are doing very interesting things, and I’m sure the first three will take some small amount of market share from the big banks by offering friendlier, cheaper, and more efficient services. But my main question for the panel was whether they would actually change the financial system at all, or whether they will always be operating at the margins while the huge players continue to do what they’ve always done, and innovate on their own terms at at their own speed.

Its the right set of questions (emphasis mine).  The banks have incredible size, physical scale and brand power.  All 4 of the panelists may be amazingly successful, but Felix asks; what is the nature of a new model such that it has the capability to have an effect on banks that we have seen on industries such as book stores, newspapers, or classifieds.

It is an interesting question.  Book stores were disrupted because of online book purchasing.  But it was more than that:  it was new physical infrastructure comprising warehouses and automated supply chain management.  Newspapers were disrupted because online updates allow us to read things live and not wait till tomorrow.  In effect newspapers disrupted themselves, but it was inevitable because it would only take one newspaper to publish news online and the rest will be disrupted.

The common element to those disruptions are advanced use of new technology tools, but at the core it is because of internet and real time access.  It is also because books and news are commodities.  I am ambivalent about where I get my book.  What I value about Amazon is how I get it, including instantly and electronically.

Financial services are an interesting combination of proprietary and commodity.  My money is mine – that is proprietary.  Advice and suggestions are a commodity.  Servicing of my money, eg payments are a commodity.

Relevance to Bankwatch:

A while back I wrote something about bank services becoming fractured and that we can expect to use multiple servicers to manage our money.  I find Bank Simple an interesting model because it seems to leave aside the proprietary aspect (money), and confine that to bank(s).  Then new models can disrupt bit by bit the commoditised parts such as payments, cards, pfm (personal financial management), personal lending, mortgage processing, and deposit gathering.

Interestingly such a model would allow banks greater flexibility in balance sheet management.  Their service would potentially lean more toward fee based service and less associated with spread management.  It could offer a way for banks to distance themselves from interest rate risk.

A future such as this has parallels in the disrupted book and newspaper world.  News still needs reporters, and books still need authors. 

In summary perhaps Felix was asking the wrong question.  Disruption is not always as complete as we think once we drill down into the facts.  And disruption is not an overnight event either.  When Amazon began in the 90’s it was the people (older) who today own kindles that were saying books will never disappear. 

So if we break down disruption, I think Felix is wrong.  The panelists he interviewed and their companies might well be on the forefront of bank disruption. 

Written by Colin Henderson

March 16, 2011 at 21:53

Posted in Uncategorized

4 Responses

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  1. You lost me a bit, here (no pun intended). In the examples of disruption that you list here, I would argue that the disruption happened because the physical nature of the product radically changed.

    Book stores are (or were) nothing but a distribution channel for books, which were predominantly manufactured by a set of firms who invested large amounts of money in the physical equipment required to put print on paper.

    Online purchasing didn’t kill book stores. E-books and self-publishing did.

    I do agree with your assessment of the disruption of newspapers — that the physical product (printed paper published daily) was displaced by continuous online updates.

    In this context, I see nothing disruptive in the nature of what Fee Fighters or Bank Simple is doing. From what I can tell, the latter is simply (pun intended) putting lipstick on a pig.

    Just because a new firm enters a market with new technology does NOT make it “disruptive.”

    Ron Shevlin

    March 17, 2011 at 07:03

  2. re: “Online purchasing didn’t kill book stores. E-books and self-publishing did.”

    I don’t see that. Book stores were killed off 8 – 10 years ago long before e-books.

    But I agree with your general point that new entrants do not guarantee disruption. I was just trying to come at it from the other angle. What would it take to disrupt banks. Felix kind of suggests that banks are not disruptible and I am testing concepts that might suggest how banks could be disrupted based on past events.

    Colin Henderson

    March 17, 2011 at 12:43

    • When you say ” I am testing concepts that might suggest how banks could be disrupted” are you referring to your company?

      Because I don’t see why your company has to “drsrupt” the industry in order to succeed, nor do I think that if you do achieve a sustainable level of lending that it would mean you disrupted the industry.

      New products and new business models are introduced all the time, and some find their niche in the market. “Disruption” is a great word to draw people to a conference session. But it’s way overused in everyday conversation.

      Ron Shevlin

      March 18, 2011 at 06:11

  3. Ron … just for clarity my comments here have nothing to do with P2P Lending unless I mention it. I am more coming at it from a general belief and expectation that banks as we know them will be eventually disrupted because of what I see as flaws in the bank model.

    Yet its not clear to me from where that disruption will come hence the post. By disruption I mean that banks market share of revenue will be shifted to other players. That disruption might come from new but different banks with different models or from combinations of new players.

    Colin Henderson

    March 18, 2011 at 09:06


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