Upstarts Prepare to Ambush the Lords of Finance

The truly disruptive competitive threat almost always comes from outside the consideration set with which those concerned are most comfortable. After all, if you are anticipating something it is unlikely to be all that surprising when it actually appears.

Financial institutions have been fending off threats to their franchise with great effect. It helps to have a lot of money and to be willing to spend it. But even as the too-big-to-fail banks and investment firms consolidate their positions, an equally well-funded and aggressive industry is preparing to take what they believe is theirs for the asking.

That industry, not surprisingly, is tech. The assault has been building for some time. Apple's recent announcement about partnerships with Visa, Mastercard and American Express merely highlights the degree to which technology and finance have become indistinguishable. What is different now is that tech no longer perceives finance to have any unique knowledge - or access to information - that it can not gain on its own.

It also has the added reputational advantage of being an industry that makes and sells products that people actually like. And despite the recent concerns about privacy, techie wealth and arrogance most of the industry leaders are popular figures compared with their financial compatriots.

Ultimately it is likely that a compromise of sorts will be engineered because a winner-take-all strategy is just too expensive and potentially destructive to pursue for long. A technologically denominated financial services industry is already mostly in place. What will change is the nature and knowledge of who is actually in charge. JL

Gillian Tett comments in the Financial Times:

Outside the circle of well-known regulated banks – and indeed shadow banks – a clutch of technology groups is quietly stepping up efforts to disrupt finance on both the retail and wholesale sides
Seven summers ago the world slid into financial crisis. And that sparked a wave of reform to reshape the way finance works, not just in the regulated banking world but also in the sphere of shadow banking (the non-bank entities that were widely ignored before that crisis erupted in 2007).

But as policy makers and economists ponder where the industry is headed, a certain irony hangs in the air. Since 2007 financial reform has been so frenetic it is widely assumed that it is regulatory issues that will reshape the industry. This may be only half true.

What is also threatening to reshape finance is something most of the luminaries gathering in Wyoming have hitherto ignored: technology. For outside the circle of well-known regulated banks – and indeed shadow banks – a clutch of technology groups is quietly stepping up efforts to disrupt finance on both the retail and wholesale sides. And while the impact of this so far has been modest, it might yet end up redrawing parts of the financial map – if not our concept of how digital money operates today.

Just as central bankers, economists and investors missed a trick before 2007 by ignoring the shadow banks because they were obsessively watching the regulated banks, this time they may be missing the new entrepreneurial trends precisely because they are so obsessed with the past regulatory debate.

For a glimpse of this, look at Money 20/20, a high-profile conference on finance and payments that takes place in Las Vegas in November. As you might expect, the roster of companies featured includes established financial groups in the payment space, such as American Express and Bank of America. There are also technology behemoths such as Amazon and Google, which are both developing financial payments businesses (Amazon Payments and Google Wallet).
But there are also hundreds of smaller players that are aggressively hunting for ways to cut established banks and financial businesses out of the equation in fields ranging from asset management to loans and payments. Some of these, such as Lending Club, a peer-to-peer lending company, are already well known. Others, such as Kabbage, which provides working capital to small businesses, and Ripple Labs, a digital currency system, are just starting to create waves. Either way, financiers reckon that about 2,500 companies are now trying to enter this field.
Most of these digital wannabes will fail. Banks have squashed many competitive threats before, and the regulatory framework tends to favour incumbents. It is also unclear how quickly consumers are willing to embrace change; so far, technology companies have not enjoyed much success in promoting the idea of “digital wallets” on mobile phones.
Then again, technology companies also have some unusually powerful advantages. For one thing, the likes of Google, Amazon and Apple enjoy credit ratings higher than most banks. Second, they enjoy far higher levels of customer support than the tarnished, wounded banks. A Wall Street group, for example, recently surveyed young Americans and discovered to its chagrin that this client group trusted Apple far more than any bank. Similarly, polls by Edelman, the US public relations group, show that public faith in technology companies has stayed high in recent years even as the reputation of banks has collapsed.

Technology threatens to reshape finance – but it is something most luminaries in Jackson Hole have ignored

And a third advantage technology entrepreneurs enjoy is a record of disrupting other businesses, from the travel industry to media. The idea of disrupting finance does not look so audacious to a tech group. Instead, as Jack Ma, head of Chinese internet group Alibaba, points out, it seems a natural development.
This trend carries risks. It raises big questions about cyber security, for example. It also raises questions about regulation that many of the central bankers at Jackson Hole have barely begun to consider. Take Alibaba itself. In the past year, after it started offering online money market funds, it has enjoyed stunning growth: it has more than $80bn from 81m customers. But oversight of this sector is patchy, and should an accident happen – at Alibaba’s funds or anywhere else – no one quite knows how it might be handled.
Nevertheless, even allowing for those caveats, the sight of potential new competition should be welcomed. It is still unclear whether players such as Google and Alibaba will enter the field on a massive scale; banks may fend off the challenge by innovating themselves. But after almost a decade in which “innovation” has been a dirty word in finance, it would be cheering to see some genuine business creativity. Especially if this produces real victories for consumers. In the banking world, this is long overdue.