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Banking has less in common with industries like music and entertainment than it does with long-entrenched pharmaceutical, grocery store and airline businesses all of which can absorb the threat of new entrants by adapting to them.
April 10 -
A look at three former bankers trying their hands at fintech startups at a time when investment in the sector is flush and banks are desperate for new ideas for digital transformation.
March 17 -
Banks' business models are even more vulnerable to a massive shake-up than industry behemoths like McDonalds and Coca-Cola. The industry will be redefined by technological change and shifting consumer preferences, as well as by regulations that limit the sector's adaptability.
February 19 -
Speakers at the American Bankers Association's Conference for Community Bankers made it clear that smaller banks must find ways to embrace new and disruptive ways of doing business to compete the bigger institutions and nonbanks.
February 10
Bankers may be taking undue solace in Chris Skinner's April 10 BankThink post, "
First is the meaning of the word "disruption." To say that banking is being disrupted does not 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 that 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. But it exists today as a mere shadow of its grand past, largely because new forms of transportation decreased demand for railroad service.
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.
The incumbents argue that their longstanding positions will give them sufficient time to adapt and react to any disruption. But advance warning doesn't always provide companies with protection. Kodak was aware of digital photography, but the company was unable to shift its legacy mindset quickly enough. Nokia and Motorola were conceivably in the best position to come out with a smartphone, given their entrenched position in the cell phone industry, but Apple a computer manufacturer beat them to the punch.
The banking industry as a whole 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 single-handedly topple the entrenched mega-bank infrastructure, but these disruptions are slowly killing banks. At least some of them.
As I have
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.
JP Nicols is a former senior bank executive and the president
and chief operating officer of
and analytics firm. He is also the co-founder of the
