Banking Disaggregation?
Zander over at USV recently posted a slide online around the disaggregation of a bank, utilizing a similar analogy onhow various online services have disaggregated craigslist.
One of the broader themes that I’ve been investigating for work is how technology is untethering customers and clients to their financial institutions. A majority of the innovation and start-up activity recently has been focused on the retail side, where customer stickiness is much harder to retain. Thanks to technology and proliferation of APIs to data, consumers can now take their information to other services that better serve their needs. As a result, even though a bank’s application and services may exceed those of their competitors, consumers are increasingly comparing banking services delivered through technology not to other banking peers, but rather to other technology companies. When I use Chase’s mobile application to deposit a check and manage my finances, I no longer compare it against similar offerings by Wells Fargo, Barclays, etc, but rather to applications such as Venmo, Mint, and SigFig. Banks have traditionally treated technology as more of an IT function rather than a full business partner, but the smarter banks have realized that technology is central to their businesses and are trying to push it to the forefront.
We are slowly beginning to see this unraveling happen on the wholesale side, albeit much slower than retail. Customer stickiness and retention is traditionally much higher in wholesale due to the cost of replacing existing infrastructure and relationships, however technology is beginning to level that playing field.
Banks are also starting to realize this shift, which leads to another theme that I’ve been following and validating: the shift from traditional balance sheet activity as the primary source of revenue for a bank to the monetization of data. At the end of the day, outside of advisory services in divisions such as investment banking, a global bank looks a whole lot more like Microsoft than anything else. Money is no longer being held in vaults around the world, but rather in 0’s and 1’s across servers and commerce is handled completely through technology. In the past, data on the wholesale (outside of trading platforms) was simply used for reporting purposes, but there is growing realization that the data itself can be a tremendous asset. However, just trying to access that data in an accessible way can be extremely difficult; all of the large banks that currently exist are a result of hundreds of mergers and their technology platforms are often out of date and just plain messy. I do believe that there still is value in a centralized relationship for banking (validated by the numerous aggregation services out there ala mint.com), and especially for wholesale banking where client aka company needs are much more complex, but it now seems to be a race for banks to offer increased transparency and access versus incumbents that start off with transparency built-in from the very beginning.
I’m still waiting for the next PayPal to come, which is why I have also been following Bitcoin quite closely. Bitcoin as a currency isn’t that interesting, but find the protocol for decentralized exchanges to be extremely interesting, and what sort of role could financial institutions play (or rather phrased differently, at what point do viritual currencies become interesting enough for FI’s to want a piece of the market?) But that will probably have to be another vague post for another time…
