Why we need brilliant banks

I have been a strong advocate of disruptive startups in Financial Services on this blog, dismissing some of the banks effort to try and move as quickly as more nimble competitors. But in all respect, for these innovative startups to launch their services, we need brilliant established banks and payments players. That is why I was surprised to read Finextra’s post Citi slaps down Bank 2.0 rivals in Innotribe face-off.

Banking is, as it should be, a highly regulated industry. After all, its all about money:

Money
It’s a crime
Share it fairly
But don’t take a slice of my pie
Money
So they say
Is the root of all evil today

More than banking only , its Financial Services that need to be regulated, for the best interest of all parties (and no the bankers are not the most important one). There is no better example than seeing the young UK P2P lending industry calling for regulation on their activities http://blog.zopa.com/archives/2010/07/26/need-for-regulation/ and proposing a self regulating framework http://blog.zopa.com/archives/2011/08/17/we-proudly-present-the-p2p-finance-association/  while waiting for the regulator to define its own. P2P Finance Association

Financial Services, to work in a global way also need a level of coordination only achieved through mature players and global coordination. Swift is a prime example. The Society for Worldwide Interbank Financial Telecommunication, is a cooperative owned by its members. It operates the pipes that allows banks to communicate with each other. The most known feature is probably payment, but other messages types are supported, from buying securities, to informing of the merger of 2 companies. In most of the world (the US being one exception). Swift is the common language of most financial institutions.

These skills (operating in a regulated environment, coordinating with different players) are very important, because without them, in the current environment, there can’t be any BanksimpleWepay or Square. These Financial Services disruptors need a ground of base services (secure holding of funds, ability to communicate with other financial institutions) to propose innovative front-end solutions to their customers. There is no point in reinventing the wheel if you can find satisfactory services with a provider and focus on your core.

But this is where we need brilliant banks / financial institutions. Because what happens when they are not is a total disruptions of their business. The recent post of Kosta Peric, head of Innovation at SWIFT, comparing bank to bank payments and Paypal payments is a prime example: http://copernicc.wordpress.com/2011/09/26/money-transfer-experiment-chapter-1-paypal/. Paypal wins easily on the transfer of small amounts between countries.

It’s difficult, for some part of the financial services industry to realize that a winning strategy for them would be to become highly qualified service providers, top notch commodities. That there is a play in becoming the efficient platform of front end services, to be more like a water service company for a major city. I believe (or assume) that is what Citi has in mind when they announced the release of their B2B API:

If banks want to enhance their own brands they need to scale. And the best way to do that is to open up application programming interfaces (APIs).“Banks need to harness the power of the developers out there,” says Citicorp’s Benjamin. 

 

Disclaimer: My employer Anthemis is an investor in Banksimple. We have recently invested in an innovative licensed bank in Germany Fidor Bank http://www.reuters.com/finance/stocks/F5RG.DE/key-developments/article/2403061. I am a huge fan of Square.

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  • http://twitter.com/danmux Dan Mullineux

    Hear Hear ! But is there really a threat or opportunity big enough that will finally make the banks listen. I hope people flock to Banksimple (and others) enough to show banks that they should offload consumer banking.

  • http://www.dmgerbino.com dmgerbino

    Yann, brilliant people are needed in most industries. The financial services industry is no exception. It will be the brilliant people who will lead many industries out of their safe zone. The rapid rate of technological change we have seen over the last decade is leading/dictating this change. Brilliance in ‘FinTech’ is not limited to start ups. This brilliance exists in every financial services company. In order for it to thrive it needs a voice. I have seen many of these brilliant people begin to band together during the last few years via social media. They engage with each other and challenge each other.

    As long as this continues, innovation will grow and thrive.

  • Kosta Peric (@copenicc)

    Good post Yann.
    Having listened to the now extensively talked about Future of Money session of Innotribe@SIBOS 2011, I can confirm your interpretation of Citi’s announcement is correct- they want to become the efficient platform for innovative front-end services.

  • Anonymous

    Good, now we need more of the same for more than payment (ie accounts / savings / financial products)

  • Anonymous

    I agree, social media really helps bridge the gap between these different worlds.