In a comment on my most recent post, where I suggested that banks are likely to be pushed out of the centre of the financial value chain, Colin Henderson writes:
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
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.
This echoes a point he made a while back when describing the State of Innovation in Financial Services.
Now, in principle, I don't disagree with Colin, since both he and I imagine a future world where banks don't hold the sway they once did. But I think what Colin is saying here is the level of influence wielded by a bank will be sharply controlled: that they will be allowed to participate in the economy only to that degree which systemic security will allow. This follows from increased scrutiny and regulation which will surely be the outcome of bank performance in recent years. That, however, does not go as far as I have done, because in Colin's typology, banks are still the centre of the financial services value chain, just as electricity and water producers are still the centre of their various distribution networks.
My argument is it is possible that crowd based production eliminates the role of the generic utility altogether. In fact, we see this for both water and power: dispersal of both to the edge of networks is already occurring. I can install a rainwater tank, and reduce or eliminate my reliance on the water company. And I can install Solar and wind to cut back on power. Sometimes, on a good day, I may even give both back to the network.
It is inevitable, I think, that this happens in banking as well. Decentralisation is a natural consequence of the democratisation of the tools of banking production. And that is happening very quickly indeed.
There's another thing going on, though, which I think makes all this likely, and that's the desire customers have to buy things unique to them. Now, as bankers, we're all rushing to personalise our offers, but let's face it, the personalisation of today is just putting lipstick on a pig. Take a mass market offer, or bundles of mass-market offers, and throw them together with some personal data and you have "personalisation". That's not going to cut it for the next generation of consumers, if it does now. They want uniqueness that no one else has.
The thing is, that's practically impossible for a bank. We're all geared up to do things with large markets and large returns. There's no way you can build a product for a market of one and get away with it. Long tail economics are all very nice, but show me the bank that can fill the role of an aggregator of long tail products (the way Amazon and Netflicks) does, and I'll be off to work there in an instant. By the way, neither Amazon or Netflicks actually make the products they sell, unlike most banks which like to link the manufacture and sales functions.
No, the only way to get to markets of one is if customers make the products themselves. This is where the "mash up" I spoke of my in my last post comes in. Customers, who are able throw together bits of offers in unique ways, and then share them with other like minded customers, are the way things will eventually pan out. These are crowds at the centre of the financial services value chain, which will be highly distributed, highly chaotic, but not subject to the system risks of a centralised banking system.
Not that I don't think there will be utility-like financial services players. The kinds of people who provide highly regulated places to put deposits, for example. My view, however, is they are niche service providers to the crowds, as will be the innovators (in Colin's typology), who will do value-add things that cut down the work that the crowd will have to do.
Now I know this scenario sounds far-fetched, especially if you are a traditionalist banker. But you only have to look at what's going on in other industries (where, by the way, there hasn't been a banking crisis to accelerate things) to know things are changing fundamentally at a very deep level: in so many other places, the large corporations are being pushed out of the centre of their respective value chains by crowds.
Check out music, where record labels are being killed off by crowds. In computer hardware and software, where open source products are significant threats to incumbents. In film, where anyone can make and broadcast anything. In literature, where you can self publish and sell through mass market channels. In manufacturing, where anyone can design anything and send to fab-plants that can make anything. You get the picture.
It is hard to imagine that an in an industry as little loved as banking, this won't happen too.