In Defense of Banking in a Fin Tech World

I know the joke. What is 5,000 bankers at the bottom of the ocean?

…A good start.

Let’s face it bankers, lawyers, and accountants are not top of the list to gather around at cocktail parties. Thankfully, now I can say I’m an Internet entrepreneur, an artist, a former racecar driver, or some other intriguing icon and not have the group slip away to refill their glasses.

Fin Tech is great.  I am a big enthusiast. It will revolutionize settlements, contracts, and small loans, as we know them. But let’s not throw out banking just yet.

Banking has historically been at the core and has always lost the fringe to disintermediation. In 2014 Quicken Loans originated more mortgages than either Citibank or Bank of America, but who provided the money? Commercial paper and high yield bonds were bank loans before. Who doesn’t now have a Schwab One or other money market account at a non-bank? Disintermediation (disruption now) brought on by market developments will continue and it should.

However, there are a couple of banking things that are not changed by frictionless flows and crowd- or micro-.

  1. People want 30-year mortgages and 5-year car loans, but want their deposits available today.
  2. A lenders portfolio is only a reflection of the state of their customers and this changes over time and cycles. When you first make a loan, pretty much all customers are OK. It’s the future that’s a problem.
  3. The exciting Fin Tech developments, as revolutionary and important as they are for the future, are not quite ready for the Mississippi River.

Who can argue with the attractiveness of immediate settlements? Instant online loans? If we add to this reducing fees, greater financial inclusion, mobility, etc. it is understandably a very attractive target for major disruption particularly given the incumbents’ earnings and inefficiencies.

Then I look at Bitcoin and envision how it could handle the Continuous Linked Settlement (CLS) foreign exchange system flows of $5 trillion per day when its total market cap (after the 2015 run up) is $6.9 billion and its daily volume is less than $100 million. I then imagine how Dwolla with its master/sub accounts at Veridian Credit Union and Compass Bank could improve on Target2 and its Euro 2.5 trillion daily settlements, 99.98% of which happen within 5 minutes.

No, these examples are not Fin Tech. They are the result of hard working people trying to deal with the core, not the fringe. It is not cocktail party or coffee shop conversation material. It does not warrant a cover story on “Wired” or “Inc”.  The fringe will become the core eventually. Eyeballs, email subscribers and click throughs were the hot ticket in the late 1990s. Then on March 20, 2000, Jack Willoughby’s article appeared on the “Barron’s” cover titled “Burning Up. Warning: Internet companies are running out of cash – fast.” Anyone over 30 knows what followed.

At the time, Alan Greenspan coined the phrase “irrational exuberance”. Yes it was, but we also know how the Internet has pervaded our lives now 16 years later. It wasn’t a straight line and it will not be for Fin Tech.

Let the thousand flowers bloom. Just don’t bet on one flower or one spring.

Organizational costs: old vs. new

Corporate organizations that predate the Internet were built based upon a military or “span of control” model. While it evolved over thousands of years from Roman times, there have been limited changes, even with the introduction of telecommunications and computers. The foundation was that a manager/leader could directly manage a specific number of direct reports. This was due to the need to gather information, understand the bigger picture, and provide leadership to the team. From the Army website, here is the traditional Army organization.

oud

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Small business opportunity

The Internet has revolutionized the information that is available to businesses and the speed with which it is available.   This has created both an opportunity and a challenge.  The opportunity is that an established company has ways to expand, grow, and leverage its experience and current business base with lower cost and less investment.  The challenge is that the Internet has opened businesses to new competition that does not need offices, sales representatives, or inventory.

An existing business has two choices:

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Entrepreneurs vs. Innovation

There are many books written about innovation and guides to help entrepreneurs, but what is the difference?  Does one need to be innovative to be an entrepreneur or have entrepreneurial talent to be innovative?

One of the most entrepreneurial corporations historically has been Citibank, particularly in the international field.  Citi had offices in far flung Buenos Aires and Shanghai before there were telephones or air travel.  The local manager had to be entrepreneurial.  I was Citi’s country executive in Sweden, Ireland, and Singapore in the 1980s and it was still that way.  We had an expression that “sometimes its easier to ask forgiveness later for a decision than to get approval before.”

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