Banking Is Too Important To Be Left To the Bankers: Is Silicon Valley Taking Over Finance?

Did Apple just launch a bank? This is a question of more than passing interest to, oh, the Federal Reserve, the Office of Controller of the Currency, the Securities and Exchange Commission - and a bunch of its competitors.

Sure, we've had PayPal and Google Wallet and banking by phone. But those are all services in which actual banks use technology to transact their business. The question about Apple and about all of the other financial innovations bubbling up (literally and figuratively) in the world of tech is whether finance is just too ripe a target not to disrupt. It's clubby, self-absorbed, over charges, under services and is otherwise sclerotic. The primary service it provides is to itself.

But with globalization and scale, there are opportunities to remake this world in the same way that music, publishing and shopping have been taught. The financial services industry sniffs the threat and will redeploy acres of capital to protect its franchise. It will buy legislators, threaten global catastrophe (something it knows quite a lot about) and otherwise throw a total hissy fit at the thought that anyone or thing other than itself is competent to do this. The reality is, however, that in pursuit of ever fatter margins it ceded the key knowledge years ago.

And now, the barbarians are truly at the gate. Tech has the tools, the brains and the incentive to take over. But everyone knows it will not be easy. Even mighty Walmart applied for a bank charter and was denied. The difference is that tech will engineer a workaround. It will be called something else and it will take the regulators a while to figure out what it is. We could say that by that time it will be too late. But there is a lot of evidence to suggest that it already is. JL

David Weidner reports in MarketWatch:

Whether it be the ease on online transactions through PayPal, the tap of a smartwatch, depositing in a bitcoin exchange or borrowing from an investor, it’s not a stretch to say a growing share of banking isn’t being done by the banks anymore.
Around early 2004, Apple Inc. executives were in a strategy meeting when they began to complain about their cellular phones.
They mocked the design, the functionality or lack of it — just about everything. Apple AAPL, +0.06%   founder and then-CEO Steve Jobs called them “brain dead,” according to Walter Isaacson’s 2011 biography of Jobs.
That meeting, of course, was the seed that eventually led to the first iPhone, debuting in 2007. It also was the making of a near-fatal blow to the cell-phone establishment at the time: Motorola Solutions Inc. MSI, -0.19% Nokia Corp. NOK, +2.27% BlackBerry Ltd. BB, +1.84%   and others lost significant market share to the iPhone in less than three years.
It also is why it’s only a matter of time before Apple, or another technology company, launches a bank. No, we’re not talking about simply partnering with a bank or just linking with a payment system such as Visa V, +0.28%  or MasterCard MA, -0.12% but actually becoming a bank or buying one.
This week, the tech bank moved one step closer to reality when Apple announced a new tap-to-pay system called Apple Pay for its latest iPhone model and newly unveiled Apple Watch.
Don’t think an iBank or Apple Bank or Google GOOG, -0.44%  Bank is possible? It’s not only likely, it’s inevitable and closer than you think — a fact underscored by the payment technology embedded in the most recent wave of consumer electronics.
Law professor Adam Levitin of Georgetown Law School believes Apple has just made itself a “regulated financial institution” and is subject to oversight by the Consumer Financial Protection Bureau.
Silicon Valley has been encroaching on financial services, especially retail banking, for years. There was the mobile-payment system Google Wallet, PayPal and Square, which provide access to traditional payment systems.
These systems largely aimed to solve a problem that had been plaguing traditional banks for years. That is, they sought to take cold, hard cash out of the hands and wallets of the customer and digitize them, thereby lowering transaction costs. The move to electronic payments followed an evolutionary line from the drive-through teller to the ATM to the smart card.
None of the tech world’s additions, however, operate as a true traditional deposit-taking institution. Some come close. Bitcoin exchanges hold deposits and some offer payment cards. Simple Bank, which I wrote about last year, was launched by software developers, and it offers low fees, handles all of the interface for customers, has its own ATM agreements and does just about everything but hold the money and deal with regulators. That part fell to Bancorp Bank of Delaware.
Simple eventually sold out to Argentina-based BBVA BBVA, -0.48% But there are other upstarts such as peer-to-peer lenders Prosper Marketplace and LendingClub. The latter filed for an initial public offering last month. These startups generally offer small loans to borrowers that, in some cases, can’t find attractive terms from traditional banks. But they also make traditional loans too. And investors, not depositors, fund them.
So whether it be the ease on online transactions through PayPal, the tap of a smartwatch, depositing in a bitcoin exchange or borrowing from an investor, it’s not a stretch to say a growing share of banking isn’t being done by the banks anymore.
That’s a profitable boon for the tech companies and obviously a problem for the banks. Apple reportedly will take a cut of the swipe fees banks will collect on phone or watch transactions. But that’s only about $40 million a year industry wide. A bigger target may be account fees, which banks collectively extract more than $32 billion annually from customers. Though account fees have fallen in the past decade, they still represented 14.1% of noninterest income at U.S. banks at the end of 2013, according to The Wall Street Journal.
But it’s not only profit potential that’s driving the push by tech into banking. Much of today’s technology is aimed at “disruption,” or put another way, remaking the way consumers interact with each other and business. Think what Uber is doing to the taxi and car-service industries and what Amazon Inc. AMZN, -2.20%  has done to retailers during the past decade.
Banking, for all of its strides in the online and mobile space, still ranks below other industries in customer satisfaction. It ranks behind automakers, credit unions, apparel stores, insurance companies and just a notch above the U.S. Postal Service, according to the American Customer Satisfaction Index.
Unlike the cell-phone industry of a decade ago, tech-owned banking faces a significant hurdle: regulation. Wal-Mart Stores Inc. WMT, +0.05%  tried unsuccessfully to gain a banking license a few years ago after it solicited a huge banking-industry backlash opposed to the idea.
But times have changed. Companies such as PayPal and Simple, and the shift of traditional banks into mobile and online platforms have blurred the lines of what truly is a bank and what isn’t.
All of this brings us back to that meeting more than a decade ago where Jobs called cell phones “brain dead.” It’s not a fantasy to think the same conversation is going on somewhere in Silicon Valley about banking. Someone is complaining about his or her bank and thinking, “we can do this better.”