It’s Too Late, Banking Is Already Being Disrupted

BankNXT: Bankers may be taking undue solace in Chris Skinner’s 10 April American Banker BankThink post, ‘Like Airlines and Pharma, Banking’s Too Big to Disrupt’. I was party to ‘The Great Digital Banking Debate’ he cites in his article over whether financial technology startups will overthrow the banking industry. Although I agree with many of Mr Skinner’s points, he discusses several ideas that merit further exploration.

First is the meaning of the word ‘disruption’. To say that banking is being disrupted doesn’t necessarily mean that the entire industry and all of its current participants will cease to exist. Disruptive innovation simply changes the game by creating new markets and new relationships between organizations and individuals, and this is already happening.

A long and storied history does little to protect incumbents against truly disruptive forces. The railroad industry, for example, is dominated by century-old players. Its high-cost barriers to entry were further bolstered by tariffs, regional monopolies and political protection, yet it exists today as a mere shadow of its grand past largely because new forms of transportation decreased demand for railroad services.

One of those disruptors was the airline industry, which does offer a better comparison for banking than books or music, as Skinner points out, but the comparison is hardly an encouraging one. Airlines have low single-digit profit margins, generate returns below the cost of capital, and are highly susceptible to economic cycles. The result has been a string of painful bankruptcy reorganizations, layoffs and mergers throughout the industry.

Skinner also dismisses the idea that ‘some geek in a bedroom’ could create the Uber of banking, but back in the 1980s, IBM probably thought there was no way some geek could eliminate their stronghold on personal computers, yet that’s exactly what happened. Michael Dell famously started Dell Computer from his college dorm room. He became the youngest chief executive of a Fortune 500 company just eight years later. A dozen years after that, IBM got out of the PC business, selling it to Lenovo. And as the waves of disruption continued, Dell was later knocked off its own throne by Apple and other companies.

Banking, like airlines and railroads, is a mature industry. Computers and mobile handsets are, too, at this point. All entrenched players in these industries face battles for profit margins and further consolidation, but disruptive innovation makes those battles even harder.

Advance warning is not protection

The incumbents argue that their longstanding positions will give them sufficient time to adapt and react to any disruption, yet advance warning seldom provides disrupted incumbents with protection. Kodak wasn’t unaware of digital photography, but the company was unable to shift its legacy culture and operations quickly enough. By the time Apple released the first iPhone in 2007, Steve Jobs had long progressed from the ‘geek in a bedroom’ stage, but it seemed at the time just as unlikely to unseat entrenched industry leaders such as Nokia, Motorola and Blackberry.

The banking industry will continue to exist, but how many individual banks will be able to make the necessary changes to stay relevant in a rapidly changing market? Not even the most disruptive of fintech companies is likely to singlehandedly topple the entrenched mega-bank infrastructure, but these disruptions are slowly killing banks (at least some of them).

As I’ve written before, failure to innovate is never listed as the cause of death for banks – it’s just an underlying condition that observers discover in the post-mortem.

Time for banking transformation

It’s true that good companies can and will survive. As Mr Skinner pointed out, ‘Some startups will eat some of the banks’ lunch’, while others will adapt. But rather than sitting back with a collective sigh of relief, bankers would do well to heed the advice that Mr Skinner has written about extensively in many of his other articles and books: Do the hard work to transform old infrastructures, cultures and business models.

It’s too late to argue that banking is too big to disrupt. The disruption is already happening.