There’s no doubt technology forces transformation. Some technology even completely ‘disrupts’ whole industries as you’ll see below.
Some people push back against it. That’s happened through all of human history. The trick is to embrace, work with and understand the technology.
Right now you’re seeing tangible change in major industry from taxi’s (Uber) to media (Netflix). Many people are embracing this change.
But there’s another change underfoot. One you may not see. And that makes it a bit scary. This change is impacting some of the biggest, ‘safest’ companies in the world — the banks.
I’ve seen it happening for a number of years now. It’s been a slow creep that’s now accelerating fast. And over the next few years it will be as ‘in your face’ as Uber and Netflix are.
Jim Rickards, Strategist for Strategic Intelligence sees it coming too. We both agree the next big wave of disruption is going to be in finance. It’s going to completely change how you interact with your bank and even how the banks earn their money.
As you’ll see from Jim below, when the former Chairman of the Fed, Ben Bernanke is shocked by the change, then you know something’s going on.
Contributing Editor, Markets and Money
It’s Time to Uber the Big BanksJim Rickards, Strategist, Strategic Intelligence
In Silicon Valley, there’s no higher praise one technologist can give another than to call her a ‘disrupter.’
The term refers to technology platforms that are not just new, not just better, but that completely disrupt existing business models and entire industries in such a way that the old model simply dies out, and the new model becomes the industry norm.
There are many examples. 10 years ago when we wanted to watch movies at home, we would get in our cars, and drive to a local Blockbuster store where we could rent or buy the latest releases. Along came Netflix, first with its physical DVD service, and later with its streaming models for delivering films.
Today the site of your local Blockbuster is probably a dry cleaner or an auto parts store.
Blockbuster itself is gone in the US. And with Netflix’s arrival in Australia, it likely won’t last Down Under either. The Blockbuster ‘drive-in’ model was completely disrupted and destroyed by the Netflix home delivery model.
The biggest disrupter to emerge recently is the online ride sharing service Uber. You join with an app, provide your location via mobile phone GPS, pay with a credit card stored in the cloud, and your car and driver arrive quickly and provide courteous service.
No money changes hands and tips are not involved. Passengers love it, but taxi drivers are not pleased. They have been striking and rioting all over the world (and enlisting the help of politicians) to stop Uber, with mixed results.
Suddenly taxi medallions formerly worth millions may end up no more valuable than stock in Blockbuster.
The essence of disruptive business models is that not only are they new, and more efficient, but the provider avoids large commitments to fixed assets and equipment, relying on the web to deliver services from existing infrastructure.
Uber is one of the largest car service companies in the world, but it owns no cars. Airbnb is one of the largest hospitality companies in the world but it owns no hotels.
Both firms are using pre-existing assets (your car, your spare bedroom) to deliver transportation and lodging. (This may be one reason why the investment component of GDP has been weak in recent years; that’s a subject for another day).
For disrupters, the secret sauce is the software platform, and mobile apps needed to connect buyers and sellers of a service, rather than capital assets.
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Too big too fail?
What if someone disrupted the banks? That question almost answers itself. It’s happening faster than the banks realise. Investors grumbling about how the government props up banks under its ‘too-big-to-fail’ policy may discover the banks fail anyway.
This will happen not because of a ‘run on the bank’ but because the too-big-to-fail banks are too big to innovate.
The banks are getting the Uber treatment from a host of start-ups, many of which have already achieved billion dollar plus valuations. These companies are the so-called ‘Unicorns,’ jargon for start-ups with a $1 billion-plus market cap.
So far, the banking elite have not been in the streets burning tires, and kidnapping passengers like the Paris taxi drivers, but maybe they’ll start soon.
Banks and regulators are aware of the threat from the disrupters. I spoke to former Fed Chairman Ben Bernanke about this when we met in Korea recently. He said, ‘You can pay for your coffee with your phone. This is amazing!’
He did inject a cautionary note.
While banks are inefficient in certain ways, they do offer consumer protections that the start-up disrupters do not. Bernanke asked, ‘Are there consumer protections for non-card payments by phone? Does PayPal have them?’
It may be that the biggest hurdle for the new firms comes not from the banks, but from aggressive regulators such as the Consumer Financial Protection Bureau, (called by insiders, ‘The Bureau,’ in ominous tones that evoke an image of the original bureau, the FBI).
Bank disrupters go under the name ‘FinTech,’ short for financial technology. It’s not a one-size-fits-all category. Some are peer-to-peer lenders, a more sophisticated form of crowdsourcing.
They offer loans online, and fund the loans with wholesale lenders like Apollo or Morgan Stanley. Their computer interfaces are user-friendly, and it’s easy to apply for a loan.
Importantly the cost structure in these peer-to-peer lenders is dirt-cheap, even free to the extent they use the internet. In the same way that Uber does not own taxis, the FinTech firms do not have branch offices, tellers, ATMs, and the other tangible hardware of banks.
They do not have bank examiners walking in the door and do not have bank regulatory capital requirements to worry about. Some obtain lending licenses under local laws.
Creditworthy borrowers to the front of the line
One of the biggest and most successful of these firms is SoFi (short for ‘Social Finance’).
They specialise in the private student loan market. Private student loans are only about 10% of the overall $1.3 billion American student loans outstanding. SoFi skims the cream, taking only the most creditworthy student-borrowers who attend high-quality, fully accredited four-year schools.
They also get parent co-signers, and limit borrowers to those with strong credit ratings. All of the less creditworthy loans are left to the US Treasury. Government student loans have sky-high default rates (with losses covered by the ‘US Taxpayers’).
Meanwhile, SoFi’s loan loss rate is practically zero.
The FinTech category is not limited to peer-to-peer lending. It includes online and mobile payments systems like Mozido and ApplePay.
Another blossoming area in FinTech is cryptocurrencies such as bitcoin. I have never been a fan of bitcoin as a place to store wealth.
But I have always been impressed with its blockchain-encrypted technology.
While most people were debating whether to ‘invest’ in bitcoins or not, the real investment action was in building platforms using blockchain technology to provide secure private transfer networks.
These transfers are not limited to crypto-currencies, but can be used for anything of value including stocks, bonds, real estate deeds, etc.
The FinTech category is amorphous and defies easy definition.
What the FinTech firms have in common is they are disrupting established markets with web-based technology, mobile apps, and scalable models with relatively low fixed costs. Sound familiar?
That’s the model Amazon and eBay used to disrupt the world of retail sales 15 years ago. Deserted outlets in your local malls are testimony to their success.
What used to be Macy’s is probably a food court today.
Retail is moving online. Finance is the next frontier.
Strategist, Strategic Intelligence
Ed note: The above article is an edited extract from Strategic Intelligence.