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Coming out of Bank Tube today, next to the Bank of England and Royal Exchange ...
I was greeted with this sight:
Police everywhere ... what was going on?
Was Fred Goodwin about to make an appearance?
Was Lord Myners on his way?
Had they heard that a banker was in town?
No ... it turned out to be a demonstration against Huntingdon Life Sciences ...
Last time I saw this lot, they were outside Deutsche Bank's offices.
Ah well, bankers aren't that bad if they're only being shouted at for helping science kill cats and dogs I guess.
Yesterday, I gave a presentation on the future of banking.
This is because I specialise in the future of banking.
When I say that I specialise in the future of banking, most people ask: “is there one?”
An awful lot of people think there is no future in banking but they are wrong.
Of course there is a future in banking … it’s just that no one knows what it is or what it looks like right now.
So here’s my way to clarify it.
First, use Michael Porter’s forces of change, which we use extensively to model the future in one of the other companies I founded: Shaping Tomorrow. Michael Porter’s forces are based upon the key drivers of impact upon a company, which are Political, Economic, Social and Technological or PEST for short**.
What’s the PEST in banking, apart from regulators and politicians (ed: are these today’s pests)?
Reasonably obvious.
Politically, lawmakers are desperately trying to come up with ways and means to get some stability back into the system to restore confidence, control and credibility.
Economically, the seizure in lending and liquidity is driving down economies worldwide. Apart from major concerns related to protectionism and retrenchment, economists are tryig to figure out whether we are facing normality, stagflation, deflation, or something worse (ed: Reformation, Revolution, Armageddon?).
Society meanwhile has completely lost confidence and trust in bankers and policymakers. Therefore, they are postponing spending, with savings levels rising for the first time in years in many of the ‘borrowing’ economies.
Technology continues to develop at a pace meanwhile, with everything completely transparent. Nothing can be hidden anymore. As a result, new models of access to financial services are arising, such as Zopa, Prosper, Wonga, SmartyPig, the new MTFs and clearing systems for trading, the Barter Network, complementary currencies. All of these are discussed extensively in the discussion series around Banking as a Service.
All in all, the outlook is one where politicians have lost control, the economy is spiralling downwards, society doesn’t trust anyone and technology is allowing them to find out why and get around the system.
What does this mean for the future of the industry?
It leads to four scenarios, all of which have a semblance of truth.
The four scenarios are based upon two key axes: the banking model is either fundamentally broken or fixable on one, and banks are the only providers of finance or there are alternatives on the other.
The alternatives to banks are not necessarily non-banks by the way, but could be new banks. In this context, just as MiFID created a whole raft of innovative new ventures in the trading arena – Chi-X, Turquoise, NASDAQ OMX, BATS Europe, Equiduct, Quote MTF, Burgundy, EMCF, EuroCCP – the theory would be that new regulations to cure the banking crisis creates new ventures for finance as an alternative to traditional ones.
Looking at these axes of extremes leads to four scenarios for the future of banking:
Banking is Fixed and Banks are the only Players: this leads to a continuance of the old model of financial servicing with traditional providers still in a position of strength and liquidity is focused upon the traditional key markets and organisations. Result: we survive this crisis but experience another one in five to ten years … hopefully, not as bad as this one.
Banking is Fixed and Alternatives to Banks are Created: the regulators and politicians encourage new regulations and supervisory frameworks that lead to new providers of service, such as the new CCP for OTC Derivatives. These new providers may be an amalgam of existing players and/or new industry consortia, and it drives a flight to safety by encouraging the largest and most secure firms to act cohesively to create confidence. Result: we survive this crisis and the weakest fail, whilst new confidence comes into0 the system through a comprehensive industry restructuring.
Banking is Broken and Alternatives to Banks take over: this is a wild west of new finance where regulators and banks are avoided due to either (a) declining business; (b) being unable to take on board business that’s offered; or (c) not being offered the business in the first place. Result: consumers and corporates are forced to use new models of finance and banks fail as new players take over. This also has the outcome of a financial system that is fragmented and uncontrollable.
Banking is Broken and Banks are the only Players: this is the worst case scenario where banks that don’t want to be nationalised are nationalised by governments that don’t want to nationalise them. Banks become puppets of Minsters of Finance and are seriously debilitated in the face of an onslaught of regulations and red tape. Result: everyone loses and no-one wins.
Right now, the world sits in a hybrid of all four quadrants, with the most likely outcome being an amalgam of all four. I just hope that the dominant scenario is the industry restructuring (top right) though, as the lower two quadrants are scary and the top left is probably unacceptable.
It will be interesting to see the results over the next year or two.
** Some refer to this as PESTLE and include Legal and Environmental forces for change, as well as Political, Economic, Societal and Technological.
There is a great deal of anger and disquiet bubbling away worldwide thanks to this crisis created by the financial system. I note however, that there seems to be a distinct lack of news coverage on these widespread protests and, in some cases, riots.
The start point of such a conversation has to be Iceland, where the Prime Minister's car was surrounded during daily protests outside the government buildings:
This is from January 21st, just before the government was replaced wholesale.
Displacing a government doesn't solve the issues, but it does make folks feel better which is why there's also a lot happening around Europe.
In particular Eastern Europe, with riots in Latvia:
Source: Reuters
as well as in Lithuania and Bulgaria, with a lot more predicted.
In fact, Eastern Europe has a growing range of issues, with shares of banks with major exposure in Eastern Europe - such as Raiffeissen, Erste, Uncredit and Societe Generale - tumbling in recent weeks.
This is because of growing political instability in some of these countries, particularly Latvia, Ukraine and Georgia, triggered by the global economic crisis and made worse by deep internal problems, such as corruption.
It has also been made worse by a battle between the European Union and Russia over the allegiance of these countries and where their interests lie.
Which would you choose, as even the Russians are staging anti-government protests that turn into trouble:
Whilst in Europe, there are protests and battles everywhere from Greece to France, Spain to Ireland; and the UK will not miss out, as the police fear a 'summer of rage'. This rage may well spill over at the G20 Summit in April, with organisations clearly trying to create a co-ordinated plan of action.
I am not saying there will be trouble on April 2nd, but I do believe that a large crowd of people protesting can easily spill over into rage and violence ... not always, but with the current anger boiling beneath the surface of most societies, don't be surprised if this happens.
Equally, I am not saying that Europe is falling apart, but it is being truly strained.
Outside the EU it's just as concerning as even the usually mild and sedate Japanese are having mild rumblings as the country sinks into 'despair'.
Most suprisingly of all the Canadians, who have the safest economy of all, are protesting as "a growing online community of Canadians who feel disenfranchised by social turmoil, economic instability, and 21st-century uncertainty (are) beginning to speak out."
The only question is why the Americans aren't actively protesting or, more importantly, will they?
I stumbled across a photographer on the Boston Globe's excellent Big Picture yesterday.
The photographer lives in Britain and his name is Jason Hawkes.
Jason's really into aerial photography and his images of the City by night are quite stunning.
He's also given me permission to present a few of his shots here, so here they are.
First, there's Lloyd's of London, the place where the Financial Services Club (UK) meets three or four times a month, and the centre of the world's insurance industry some would claim (double-click the photos to see in large size):
I think you can just about see a few of our members falling out of the front door at the bottom of that one!
Then there's the Gherkin, or the Swiss Re building as it should be called:
Who's that sitting in Room 1802 and what are they doing in 1803?
Then there's the beauty of the London Cityscape:
This is the core of the City of London. A City that dates back to Roman and pre-Roman times. A City that never sleeps. Hi, my name is Sam Spade and I'm investigating ... whoops, sorry, got a bit carried away there.
Finally, there's the new City of London which is Canary Wharf:
Based upon the recent press about banks and the City, we should be thankful that the lights are still on and, as we reinvent this industry, we need to focus upon maintaining the City's heartbeat.
Gordon Brown said yesterday: "as we design this new regulatory system, we have to be clear as a nation about what we expect from our banks ... This should not be at the cost of Britain hosting big international banks. There is no room for parochialism or protectionism in our model of the future. Global financial flows and liquid capital markets have brought massive benefits to our economy."
Too right, so let's make sure that the lights stay on!
p.s. thanks again to Jason Hawkes for letting me use these photos which are quite special.
This is my fifth posting about why banking will be free (Parts One, Two,Three and Four).
I keep talking about this as it's clarifying my own thinking, and I'm intrigued to see if anyone wants to come up with an alternative.
This posting comes around because I was thinking about Banking on the Network and whether banks really will give away banking for free. So here’s how the pricing and economics of Banking as a Service (BaaS - SaaS for banks) works.
The bank recognises that most activities outside direct servicing of the customer is commoditised. A commodity is worth nothing, and so all processing and technology is priced at near zero because they become freely available networked widgets (as discussed last time).
Commodity processing being made freely available is a radical departure from bank histories which is why this will be a culture shock for many bankers … and yet, the pricing and economics is relatively obvious.
Let’s start with the cost of building BaaS.
The cost can be however much you want it to be. In HSBC’s case, the cost of building their global internet service is around $250 million … but that’s cheap enough considering that they were building a global bespoke service.
For HSBC that means they can launch a completely customised internet banking service in any country, by just ticking the boxes you want in that service and it's up and running. No additional development or cost.
But for most, it's not $250 million developments, it's a few thousand dollars to deploy a piece of functionality.
Y’see the key point is that, whatever the cost is, once it’s built - it’s built.
That’s it.
You have sunk the cost and built the widget.
Now, the critical point is not to protect the widget but to get everyone to use it.
What’s the point of investing in a developments today if you can’t get volume?
And that’s the point of BaaS: once you’ve built your widget, crank up the volume and volume increases fast these days.
That’s how Chi-X, the pan-European equities trading facility, could take more than 10% of many traditional European exchanges equities trading ... within a year.
And, having built the system, it is why Chi-x, Turquoise and NASDAQ OMX and co are after volume.
It is why Zopa, SmartyPig and PayPal are leveraging volume.
And that's what any bank building components of applications should be thinking about today.
Volume.
Because additional volume adds zero cost and purely feeds return on investment.
Think of it like making movies. Once the movie is made, you’ve spent all the budget. Now, the point is to get bums on seats and market the hell out of it.
And that’s how banking widgets in BaaS should be considered.
Market the hell out of your widget, crank up the volume and focus upon the service delivery – the human interfaces – as your critical value-add differentiation. Your value-add is how you package the widgets and present them, not the widgets themselves.
That’s why Citigroup have been marketing the hell out of their FX and other services for the last two years. They want volume on their widget, and Citi are one of the few banks who have been white labelling their systems to other banks. They get some of the BaaS components.
The idea is really illustrated by telecoms folks who get networks. For example, I once worked for NCR when they were owned by AT&T. I always remember the AT&T guys talking about “minutes on the network, it’s all about minutes on the network”, and that’s the key.
Once you’ve built the infrastructure, it’s all about getting volume because it costs you no more to process a billion calls than it does to process one.
Which brings us back to the economics of banking in the future, under the BaaS model and the culture shock this creates.
I was recently with a head of payments at one bank for example, who said: "our technology guys asked me the other day why we charge more for a $50 million payment than we do for a $5 payment, when the infrastructure costs to process are the same? Are they mad?"
No sir. They are asking an obvious question at the heart of the change that needs to be made to banking cultures as they realise the change that technology now delivers.
This payments guy was from that old school of banking that are the ones now waking up to the new world realities.
Thirty years ago, when many senior bankers were starting out in their banks, they were told that technology was expensive, inflexible and must be used forever, or at least until the systems peg it anyway.
That’s why every project was massive, time consuming and demanded huge cost.
When SWIFT, MasterCard, Visa and the key networks for transaction processing were built, for example, they had to be built by an industry consortium. No individual bank could afford such a huge project or cost. That is why these were cooperative groups back in the 1970’s across all banks, even though MasterCard and Visa are now proprietary firms. Nevertheless, the MasterCard and Visa IPO’s are only recent and recognise the economics of BaaS.
For example, back in 1975, the bank technology economic model looked something like this (double-click the image to make it bigger):
Massive cost that slowly over time could be recouped through usage. Cost was depreciated slowly, and could only be covered by high prices and margins. Hence, banks, SWIFT and the card companies all worked hard to create the infrastructure, and cover the costs of that infrastructure through high transaction processing and interchange fees.
That was back then.
This model had changed a little by 2000.
What was happening in 2000, was that the post-Year 2000 hullaballoo was over. Many systems had been renovated and rationalised. And the costs of building new systems had reduced somewhat thanks to HTML (an internet language) and component/object-based modelling.
Therefore, banks found the time and cost of building new systems had been fundamentally reduced … but the costs for usage and pricing did nto come down as fast.
After all, if you’ve got a good thing, hold on to it! So the pricing and fee rates did not change dramatically, although we did see SWIFT’s model changing.
For example, the then CEO of SWIFT, Leonard Schrank, was interviewed in 2003, and made a few statements about SWIFTNet was well underway using IP-based messaging, costs for a typical SWIFT message had come down 70% in the last decade, whilst volume had increased four-fold to 8 million messages per day.
This shows the new economic model in play:
What we were seeing a decade ago is the cost to build was coming down, and volume was rising faster than before, thanks to ease of communication and connection.
SWIFT gave those savings back to their banking members, because they are bank-owned. However, banks have not yet passed all these cost reductions on to their clients but, thanks to today's competitive forces, they will.
Today competitive forces recognise how the network has changed these pricing models even further:
Today, the cost to build should become virtually irrelevant if you are using the right tools but, once built, the volume can be cranked up really fast, thanks to openness, standards, ease of networking and communicating.
You see, the bottom line is that the economics of banking has fundamentally changed. This is because banking is based upon technology, and the economics of technology has fundamentally changed.
New economics of banking: technology and systems, processing and functionality are virtually free; anything that is commodity activity should be brought in as a service and all pricing is for value-add, not commodities.
Today, it is a no-brainer to build new functionality, or even micro-functionality, and then deploy it openly, transparently and easily across the network.
That’s why banking will be near free.
It will be free because banks can build micro-functionality, widgets, and then make money out of volume.
If I can get a thousand banks to serve a million companies processing a billion transactions through my banking widget of commoditised functionality, then I make money. And that process is far better than one bank working with a hundred firms to transact a thousand times through my very expensive and out-of-date legacy infrastructure.
The latter is the old way.
Banking on the network is the new and better way.
And how do banks make money in this new world?
By being the lowest cost integrator and offerer of the best white labelled banking widgets, and then charging me for advice and superior services to those commodity services offered by others.
This final part if where the culture shock will really hit.
In a world where every bank is offering transactions and processing for nothing, how can you make me feel you’re so worthy as to be worth a fee?
The answer to that one is to focus upon the customer experience.
The customer experience, service, dialogue and advice will become the critical differentiation and profit point.
Whoa … now that’s going to be tough isn’t it?
Yep.
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