Banking and corporate leaders and middle management seem to have been passively observing but not proactively responding to the VC and angel funded onslaught of web and mobile-driven ‘apps’ and marketplaces.
Part 1 of this post sought to define what we mean by Uberization and touched on the elements of disruption of the Taxi and Hotel segments, witnessed and adopted first-hand by corporate leaders and consumers alike.
So how does the on-demand economy apply itself to business and retail banking?
‘Uberization ‘of bank branches? Sure, the banking correspondent and distributed merchant model has been around for a while now, with the ATM and branch substituted by merchants either for cash, airtime or both. Rather than disruption, this has filled a huge performance gap and has accelerated financial inclusion. Sure. Instead of using a card or bank account, is there an on-demand way to transact without these?
Customer acquisition? Maybe. Uber itself is a distribution partner for banking car loans; carmakers are probably already working on future business models that may further empower the Lyft and Uber models; or reshape them in time to come.
Virtual bank accounts have been offered by large banks to corporate treasurers for some time now via their cash management offerings. Innovating further, fintech players have created virtual bank brands, supported by the infrastructure of a regulated existing bank, but infusing their front end and marketing with a better user experience, user interface (and presumably service levels). In the UK these started out as internet only banks and now we are getting ready for entrance by mobile only banks. Whether the customer acquisition and servicing costs can overcome customer inertia and be offset by the data-driven revenue streams anticipated will be watched closely by all.
What about payments, which has probably attracted the largest startup intervention? Non-bank payment networks and wallets form a layer between my debit/credit card and my intended payee. My bank account and debit card are still part of the conversation on my end, but the payee sees a PayPal or another brand.
The payment network or wallet’s ability to convince utilities and merchants to accept its channel has been combined with the convenience of one stop aggregation – the ability to pay multiple parties quickly. In that way, the payment interface has reduced the distance between me and my counterparty, saving me time to stand in line to pay a utility bill.
As a banking customer in the UK, I can do this through my bank account or debit card quite easily and don’t really need a wallet layer. However, in under banked segments or countries/areas where payment networks are not as advanced, the wallet layer is a positive for both the payee and payer. The Indian payments landscape is a great example of how incumbent and new bank and non-bank players become part of the inclusion machine to accelerate financial reach. The ecosystem relies on people (correspondents, agents) to extend banking to those outside of current infrastructure. ‘Uberization’ in one sense, but with banks using external suppliers.
Uberization of intermediaries? Investments and lending have an ecosystem of bank and 3rd party intermediaries (capital markets, lending, investment advisors, wealth managers ) who sell their own products as well as those of competitors.
The number of Robo-advisors and financing marketplaces has exploded in the last few years, affecting primarily the intermediaries (internal and external). Volumes have grown dramatically but still account for less than single digit market shares. One consequence of online financing marketplaces I have observed (and would like to see if any academics have studied and quantified actual agency costs) is that the cost to the borrower has actually gone up.
I still recall from my investment banking days, clients jealously guarding every basis point when negotiating fees for fundraising or acquisition support (both fairly labour-intensive work). However, today i see borrowers paying healthy double digit interest rates on loans and what seems to be substantively higher equity arranging fees. Commissions taken from the buy side (investors, lenders) also remain healthy today.
It was suggested that the blockchain itself may be the Uber of banking.
The trusted, proof of work benefits of shared ledger blockchain have many potential applications, but in the end, the blockchain is, in my view, an upgrade of infrastructure rather than disruption of banks.
With central bankers and global banks all testing the blockchain, I believe it’s only a matter of time before it is applied within their regulated rule sets. Exchange controls are a key concern for most emerging markets central banks, let alone regulatory concerns on money laundering.
Open-APIs could be an interesting change we will need to watch unfold. The impending PSDX2SA imposition on banks to open up data to 3rd parties in Europe, combined with mobile payments, and the hordes of machine learning start-ups offer an increasing range of disruption and reinvention options.
Positive for consumers. And revealing of how the financial services industry, traditionally huge spenders on tech, became bogged down by legacy systems, increasing regulation and bulging middle management-driven, slow decision cycles.
Unlike the on-demand disruption of taxis and hotels and other consumer services however, bank APIs share data from the regulated entity (banks). While 3rd parties extracting data via bank API will be dependant on the source bank it would be interesting to see how much of the bank’s reshaped ecosystem becomes emulated by banks themselves and how much of the system remains open in the long run.
But back to the original question I asked myself at the beginning: to achieve better banking, do we really want to ‘Uberize’ it?