The Bankwatch

Tracking the consumer evolution of financial services

The inevitability of disruption in financial services and some reasons why

As one of the “seven” readers of Ron’s blog, he makes a good point about disruption that I would defend. Its all too easy to get caught up on the new shiny object of any one innovation, but thats hardly disruption. When we look at the big 5 banks in Canada each making well north of $1 bn – $2 bn per quarter, and having assimilated all digital/direct banks before them, there is little sign of immediate disruption.

Define Disruption – Snarketing

Should’ve taken a cue from Bill Clinton, and when asked about the potential for disruption, I should’ve said “Define disruption.”

Having said that though disruption is eventually inevitable. While I agree that millenials will grow older, want to buy things and require credit, I don’t believe they will grow to be like previous generations.

Online banking is 18 years old this year. There is no longer anything new about performing self service transactions using internet. What has changed (in Canada) is that 97% of the population is online, and online banking penetration is north of 60%. When online banking began, internet penetration was 5% – 7% and online banking penetration was 0%.

Banking online through web is ubiquitous and mobile is growing at an astonishing rate. Mobile is driving new behaviours amongst people simply from its utility, ubiquity, and frankly fun.

Back to millenials. They have known nothing else. Living digitally is a natural for them and they will always gravitate towards the financial service providers that live as they do.

Disruption will come from two areas I believe:

  1. banks will be worn down by many innovative players, each potentially small, but in aggregate beginning to make a difference, but
  2. real disruption will come from something we haven’t yet seen and probably in the co-opetition space that exist between banks in Canada in particular, but between US banks also in their reliace on common service providers

Using Ron’s dinosaur metaphor, there is evidence they were gradually outgrowing their environment, but that also were hit by event(s) in the form of a volcano, or meteorite.

Relevance to Bankwatch:
I look at what Paypal who have a renewed energy are doing with their payment app. I see Stripe who still come across as a bit techy but who have major valley players behind them. Paypal and Stripe have one thing in common. They bypass one co-option area called interchange. They facilitate bank account to bank account payments.

Rons own definition of disruption follows the Christianson model which says disruption occurs when a business model is dislodged. Payments are not the only source of revenue for banks, but they form the gateway to financial service relationships through the primary account.

Banks have a weakness behind the apparent strength of their co-opetition in areas of payments, cheque handling, statement handling and back room processing. Those co-operative efforts, often driven through Government restriction on bank mergers form a straight jacket for banks that contractually ties them to legacy approaches, and this makes innovation more difficult and complex from inside the bank.

Written by Colin Henderson

May 30, 2014 at 00:04

Posted in Uncategorized

2 Responses

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  1. As one of the seven regular readers of your blog (lol), I would agree with most of what you are saying about disruption in financial services. I agree that payments is the area that we will most likely see disruption first, because it is one of the main areas that banks are using oligarchic practices to maintain very large profits while using regulation to stifle competition.

    But its not the fault of regulation in Canada preventing bank mergers (although you could argue that allowing banks to merge might have forced the Canadian government to loosen the restrictions on new market entrants — eg Walmart). It is the regulations around payments which are the issue — effectively barring new entrants from the payments system maintaining the Visa / MC / Interac status quo with their interchange fees — even as banks work to move away from the Interac part so these fees can be increased. If online security issues can be addressed, this is where merchants can force through disruption to the payments system.

    Rob Burbach

    May 30, 2014 at 07:25

  2. Thanks for that comment Rob. I may have mis-spoke in that I intended that regulation has resulted in banks co-opting with Symcor and the likes. But yes the larger point remains as you indicate that payments are the next frontier, and the dynamic surrounding interac is fascinating to observe.

    Colin Henderson

    May 30, 2014 at 23:04


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