Are banks doomed?

Telecommunications services were commoditised in the early 2000s. Are banks next?

Banking

Photo: Alexandre Dulaunoy (Some rights reserved)

1. The rise and fall of the telcos

Ben Evans recently made the point (in Unbundling innovation: Samsung, PCs and China) that most truly innovative internet services are invented by companies that are built (from the ground up) to sell technology to third parties. In other words, by companies that sell technology services as their core business.

But what if the CEO's elevator pitch does not include the words "sell technology services", but instead includes the words "sell telecommunications services"? Or for that matter, "sell banking services". Will that company be be able to invent and sell world leading "digital" services? Before the iPhone was released (i.e. back in the early 2000s), telecommunications companies certainly thought so.

As Ben says, the telcos were:

"intensely aware of all the cool stuff that was going to happen with mobile and the internet. They predicted a great deal of it very accurately, but they thought that they would be doing all of it.

They thought wrong.

Traditionally, telcos controlled the services that run on their physical infrastructure (i.e. over their land lines and fiber networks, and via their wireless spectrum). The telcos were able to book significant margins for these services (e.g. phone minutes and SMS). Telcos also tightly controlled the types of phones (and other similar devices) that customers could buy.

But, as Ben points out, the telcos were unable to compete (i.e. maintain control over these devices and services) because:

  • they were structurally bad at making services;
  • even if they were good, those services were just one amongst many; and
  • the network effects for these services ran across the whole internet, not just their customers.

In other words, the iPhone and then Android ate their collective lunch.

Specialist technology service providers sold (i.e. unbundled) physical phones and services from the infrastructure owned by the telcos. And you have to think that the telcos will never again make enormous margins on these services (e.g. phone minutes and SMS).

2. Will banking services also be commoditised?

This brings us to banks.

McKinsey also published an article recently about the rise of the digital bank. The argument in this article is that as "European consumers move online, retail banks will have to follow. The problem is that most banks aren’t ready".

I am sure that this is true, but I think that the article misses the wider point. We should instead be asking whether banks are failing to provide "digital" services because banks are not ready, or because banks cannot (i.e. are not built to) compete with dedicated technology service providers.

Let's take a step back. What services do banks actually provide? For most individual customers, banks (in Western countries at least):

  • store their money in savings accounts;
  • allow customers to pay for goods and services using debit and credit cards;
  • allow customers to withdraw cash from ATMs;
  • provide internet banking services (via the web and mobile apps) to allow customers to check their account balances and transfer money; and
  • loan money to these customers (for houses and other tangible goods).

Banks also provide lots of other services. Including, importantly, liquidity to businesses and individuals. And I am sure that I have missed other key services. But I think that the above gives us a general idea of the core reasons why most individual customers use banks. For example, customers can also:

  • go into a branch (although, unless there is some sort of problem, how often do they do this?);
  • pay for goods and services using cheques (a payment method that cannot be much longer for this world);
  • provide "wealth" services, superannuation and insurance advice;
  • etc.

Therefore the telcos may be in a better position than the banks. Telcos have infrastructure (i.e. the landlines, fibre networks, and wireless spectrum) that may become, or arguably already are, commodities. But people still need this telco infrastructure to actually use telecommunications and internet services (i.e. to make phone calls and access the internet).

On the other hand, unlike telcos, if all of the bank "infrastructure" (other than possibly ATMs) dissapeared, in the long term how much would that effect the average banking customer? And do these current bank customers actually need to deal with banks? Especially if bank competitors (e.g bitcoin or paypal) provide ways to store money, pay for goods and services (removing the requirement for cards, ATMs, and physical cash), and loan money to customers at scale (e.g. and don't laugh, by croudsourcing).

3. Are banks doomed?

No. I think. But here is Ben again:

The analogy I often use in this case is that [this] ... is like a municipal water company deciding to get into the soda business - because it knows water, and has trucks, and customers trust its brand. Even if it managed to come up with a great soda, it would still be just another can of soda amongst many.

It isn't their place to provide it ... even if they could.

To win, banks need to stay ahead of their non-bank competitors. And provide world-beating, or at least world leading, technology services. Particularly payment services.

That is the challenge.


This post originally appeared at iainmclaren.com. Thanks to Josh Morris for reviewing an early draft. These opinions are mine. They are not necessarily those of my employer. Or Josh.