Banking at the centre or the periphery

Picture this scene: I'm in a meeting where we're trying to work out the future of banking. Not just next year, or the year after, but in 20 years from now. This is an exercise, by the way, which is valuable for everyone to undertake. No-one expects to get their predictions right, but it crystallises thinking about some of the issues right now.

Anyway, so I'm in this meeting, and I present, as a working hypothesis, the idea that banks may no longer have a significant economic role in 2029.

Surprisingly, it was a junior consultant working in the bank, a gen-Y-er, who said to me "Huh?. Banks have been around for hundreds of years. What's going to happen in the next 20 to kill them off?".

Notice that the immediate misinterpretation of my remarks was that banking would end. But what I actually said was "significant economic role". There is a difference, and I think it an important one.

The real question is whether banks will remain at the centre of the financial services value chain, or be forced to the periphery. In the latter case, they still exist, but have a less significant economic role. They become providers of niche and specialised services, services which are important, but don't have economically earth-shaking consequences.

It follows that something else would flow into the void left by the banks.

Now, as with all these exercises, you never know for sure what might happen in the future. But you can extrapolate from trends you see today.

For example, the increasing pace of change.

The rise of non-bank competitors.

The democratisation of the tools of banking production.

Generation-Create, and their penchant for turning the stuff we do into something we don't expect.

Consumer mistrust of banks.

Increasing banking system complexity and rising regulatory costs.

And many, many more.

If you think about these trends a bit, you can come up with some interesting scenarios. I like to typify them as a binary pair: the worst possible thing that can happen to banks, compared to the best. For example, the increasing pace of change might make it impossible for monolithic banks to keep up, so they persevere with products and services that no one wants until they wither and die. On the other hand, the increasing pace of change could be something banks take active steps to address, and they mobilise their huge resource advantages and leave their competitors in the dust.

You can do the same for all of these trends. Generation-create, for example, might mash-up its own bank using commonly available internet services on the one hand rendering banks obsolete. Or a bank might provide an API for its services on the other, and therefore become part of a mash-up itself. In the latter case, this would be a shift towards the periphery, rather than the centre of the financial services value chain.

When you do this kind of analysis systematically, you quickly get to some interesting clarity around the issues of today. And of the kinds of strategic decisions banks would need to make right now to position themselves where they want to be in 20 years. That's the point of the innovation process I describe in Futureproofing, by the way.

As far as I am concerned, I don't see the end of banking as we know it happening in the next 20 years, no matter how provocative I am with new consultants coming into the bank. But I do think the moves we all make now will determine whether banks are able to – or even want to – retain their economically central role in the future. My own view is that a move to the periphery is inevitable.

And as to what will fill the void that's left?

Crowds.

Comments

[FredericBaud]

James, for the sake of the thought experiment, let's open up the box completely:

By 2019, Humans have been replaced by Intabees (Intelligent Artificial Beings) as the most intelligent form on this planet. Intabees are capable of handling very complex problems and operate in large groups to address the huge - and interesting - problems Humans keep creating. Humans concentrate on futile things, first because they are extremely good at doing that and because Intabees do not find futile things interesting. At the opposite, Humans are very interested in futile things created by their kins. So the whole purpose of the economy now resumes to the exchange of futile things between Humans.

What about banks? Actually banks have ceased to exist, they have been replaced by guilds of Intabees. Not so much because of Money, that Intabees find futile, but because of the problems created by Money - that Antabees find extremely interesting. Of course human banks have not been able to create a competitive advantage based on futile banking, and this is why they were wiped out during the great financial disaster of 2017 (interestingly Intabees didn't do anything to prevent this from happening).

In this picture, there still remains an open question to know if in 2019 blogs will be ran by Humans or Intabees ;-)

[Colin Henderson]

Fantastic post James. My own thinking on this is that banks, and we already see this to a certain extent, will evolve into two groups that I have roughly describe as:

1. financial utilities
2. innovators

The former will meander in and out of government control, but never stray far as economic impacts exceed the stress test results periodically. On their clear thinking days they will consider new services or approaches that will work in the future environment you describe so well, then realise the infrastructural change required is prohibitively expensive and risky and go back to providing basic service to the 'system' as water and electricity utilities do.

The innovators will see beyond that, and carve a niche approach (large or small) that plays a role (large or small) in your mash up world. I used to call that disaggregated financial services, but I might steal your mash-up line because it is how the web 2.0 generation view everything. The Citi consolidator of everything view no longer holds true in 2029. Innovation will not necessarily be fancy or catchy - just practical and something people actually want.

Anyhow thanks for the provocative post. I truly wish your bank well and to be in the second category.

[JJ Hornblass]

I don't want to rain on anyone's thinkfest, but I am not feeling this post. It is simply impossible to consider the future of "banks" in 2009, 2019, 2029 or whenever without being specific about the banking function. Sure, the wave of personal finance applications online have the potential to dis-intermediate retail banking ventures, for example, but these apps clearly do not have the same ramifications for commercial banking, let alone wholesale banking or securities banking. It is hard for me to imagine financial enterprises that possess vast quantities of capital not playing "significant economic roles" in, say, syndicating huge corporate loans. Will it be a "bank" that possesses such a vast quantity of capital? Who knows. But the function of a syndicated loan offers the same economic bang whether it comes from a Bank (capital B) or some enterprises that holds a great amount of Capital (capital C). Let's not simply call something innovative because it goes by another name.

Further, "crowds" are very much a part of banking today. Is it not true that wealth is created and un-created by the moment by crowds affecting publicly traded stocks, and is that wealth not a source of capital for those public companies? There is a reason why the word "banking" is embedded in the phrase "investment banking."

No, the innovation I see in 2029 is not in form, but in function. "Banking" will always take place, and what I mean by that is capital management, acquisition and allocation will remain an important economic fixture. That is unless we (I am in the US) move to some alternative communist economic reality. Not likely. What will change, however, is the way in which "banking" is done, and mainly the innovation by 2029 will come in our understanding, assessment, allocation, and management of risk. The flexibility in banking that we all pine for today can only come about after institutions providing banking services vastly enhance their risk management practices. Everything roots from risk management. Fully 30 years of evolution in banking has come undone in the last two. Every gain made in quantitative analytics -- gone faster than you can say, "Geithner, give me my tax dollars back." Twenty years is about the duration of time needed to get that groove back, to return to a scenario where a quantitative assessment is accurate to the millimeter, rather than the mile. From there all other "banking" innovations can bloom. Yeah, I can picture that.

[Buzzlending]

Interesting post indeed. Do you really think that bank core business processes will drastically change in the few next years? I'm not not that sure. My view is that the heart of business will not move that much actually. But the way a bank can interact with the customer will definitely change since the end user experience is still controlled and tied to the bank back office right now. The end user interface is unattractive when you can have rich interfaces, collaboration, agility, transparency... A bet for the future? when bank will have no other option than to improve the customer experience, they'll certainly do it while protecting their heart of business from outside just changing the way they share informations and some front office processes. It is not a revolution it's smooth evolution.