What will it take to disrupt banks?
Brett King has a three part series of blog posts on Finextra that provide a good backdrop to state of startups in financial services.
I commented today with this, and wanted to expand on it after about the notion of disrupting banks.
I would take issue though that we are perhaps not yet seeing the ‘disruption of banking’. As both a long time observer and market participant (disclosure – I am involved with CommunityLend in Canada) I see these startups carving a useful niche, sometimes profitable, sometimes not. These niches are small and particular. I believe Giles (quoted – from Zopa) when he states he has a better credit model and he is also particular in what he allows on the books. Not to defend banks, but they have been under political pressure for decades to provide banking services to all. It is also true they have been driven by quarterly targets to maintain stock market returns ( and employee bonuses).
This targetted versus generalist customer model view goes some way to explaining what we see in todays startups. It might also go some way to describing what the future of financial services might look like; a much more divided, niche, targetted set of providers numbering in the hundreds or thousands could well be an outcome.
We are yet to see a model that scales up the way a large bank scales however. It is wonderful to see the start up activity that we see and I am happy to be part of that, but I include our own efforts in recognising that we are only nipping at the ramparts of the big banks, but we are hardly threatening to tear down those walls yet.
As a side note, in that future world of many startups providing financial services, I wonder how the regulators will act and what the impact will be of the first major catastrophe that affects thousands or millions of customers somewhere – a reality that will undoubtedly and unfortunately occur.
The idea of disrupting banks is something we all think about, but it is hard to do. Part of the reason is that banks are the sum of very attractive component parts (deposit taking, lending, servicing fees) that requires them to be part of a restricted club run by the government, and the cost of entry to that club is very high. Once you are in, you can operate on a very low capital base thus reducing cost of capital lower than other industries. This makes banks attractive and it makes them resilient to disruption.
So start ups come along, see this barrier to entry and attack banks by picking one of the banks’ component parts, say lending (Lending Club) , or say servicing (BankSimple) and target that vertical amongst niche customer markets. Sometimes this avoids regulation, sometimes not. Just ask the P2P Lending folks in North America.
Going back to my comment on Bretts post this has not yet shaken any banks or required them to shift strategy in response. In fact one of the problems with banks is that while everyone complains about them, almost everyone trusts them with their money, largely due to the implicit government guarantee even beyond deposit insurance limits.
The magic will come some day when a start up is able to satisfy the aspects of trust and superior service or even better , make some aspects of banks’ irrelevant by displacing some core aspect of their model with sufficient volume to matter.