By Bernard Lunn
One of my favorite Fintech strategists is Chris Skinner. He usually gets it right and does it in interesting and entertaining ways. However I think he gets it wrong in this post in American Banker where he says:
Like Airlines and Pharma, Banking’s Too Big to Disrupt
I am not sure why he got it wrong. Maybe he was trying too hard to give American Banker readers what they wanted to hear (despite all the hype, don’t worry, banks will be just fine).
Or maybe he failed to do the digitization % test. This is what % of a currently delivered service could be delivered digitally? The example he uses of airlines illustrates this. The % that can be delivered is low – you still need physical planes and fuel and pilots and…
It is not size that protects airlines from disruption it is the % of a currently delivered service that could be delivered digitally. You would need huge science breakthroughs to change that % in airlines. Ditto with Pharma (a bit easier than Airlines, but still hard). We all hope for those science breakthroughs. They will happen. However the timeline for these science breakthroughs is totally uncertain. So VCs won’t invest in Upstarts. So Incumbents are fairly safe.
No science breakthroughs are needed for Upstarts to beat Incumbents in banking. There might be a conceptual breakthrough, but the science/tech is trivial. This is where Banks need to look at what happened to the media industry and that won’t be a comforting look.
History may not repeat, but it does rhyme.
It is still to early to call winners and losers in the Fintech game.
- Will Fintech ventures stall when the next downturn hits, enabling Incumbents to snap them up cheaply and use their brand and capital to win the game at a pace that they dictate?
- Or will agile beat scale and a few Fintech platforms emerge that become as valuable as Google and Facebook?
- Or will tech companies with existing scale such as Google, Facebook, Apple and Alibaba win the game?
The media industry was the first to be hit by digitization because a high % of a currently delivered service that could be delivered digitally. That was obvious as far back as 1996 when Netscape had their IPO.
You can trace the media story through the cycles that Yossi Vardi (“godfather of Israeli high tech”) illustrates so brilliantly:
The timeline for Media:
- 1996 to March 2000 – Greed/Dreams
- March 2000 to 2004 – Fear/Despair
- 2004 to 2014 – Value Created
I have a different perspective because my career has NOT always been in Fintech. I started in Fintech before it was called that (in what is now called Traditional Fintech) and then moved into outsourcing and digital media. During the time around 2002 to 2007, I saw the decimation of the media industry first hand. When the tech bubble burst in March 2000, we entered the Nuclear Winter of tech when it became accepted wisdom that nobody would ever buy tech ever again – remember those days? The reaction by media folks was:
“phew I am pleased all that craziness is over and we can get back to business as usual”.
During the Fear/Despair period, two companies grew like weeds – Google and Facebook – and guess what happened to the traditional media industry?
A really small number of media firms thrived in the aftermath of the digitization tsunami. The ones that come to mind are Conde Nast and Vice. Bankers should be studying them and looking at the fate of all the media firms that did not adapt so well.
You can track this trajectory in a subset of the media business – music – where the % of currently delivered service that could be delivered digitally is close to 100%. First the Napster explosion (free and illegal), then the iTunes make a ton of money phase (cheap and legal) and now the next generation battle over streaming. In all that trajectory, physical delivery of music via CDs and stores simply disappeared. Music is more than 90% digital.
Another trajectory worth studying is Retail/e-commerce. This has a lower % of currently delivered service that could be delivered digitally. You still need physical goods and the transport required for physical goods.
E-commerce is about 6-7% of retail sales. Digital music is north of 90% of music.
Will digital banking banking be closer to e-commerce (6-7%) or music (90%). I think it will be closer to music. It will be more like print vs online where:
- Older people prefer print/branches at least for a while (Kindle ended up converting a lot of Baby Boomers). Executives who want proof that this “new hyped stuff will blow over soon” point to this as a reason for inaction.
- A few niche services thrive in the old format (e.g Wired Magazine, Economist, FT) with clever combining of print + digital. These are – quite rightly – lauded success stories. However they are also outliers/exceptions and mainstream is now digital.
Banks today are “data centers with fancy lobbies” like media businesses around 2005. If the same trajectory plays out as in media, the % of financial services that is delivered digitally will be like the media business within 10 years – which is the gestation period of a Unicorn and the planning horizon for those involved in strategic planning for banks.
Who will be the Conde Nast of Incumbent Banks? Who will come from legacy to create compelling services that combine digital and traditional?
When the next market crash happens (whenever it is) and 90% of Fintech startups fail – look at that Yossi Vardi picture again before going “phew, I am pleased all the craziness is over”.
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