PeakBank : Why Gonski is wrong on Banks

There’s no doubt that ANZ Chairman David Gonski is a seriously smart, capable guy. Like off the radar smart, like off the radar capable.

Yesterday in a speech to the Australian Governance Summit in Melbourne Mr Gonski said :

“Disruption is becoming a bit of an excuse as to why failure can or will occur.” and that banking will not die at the hands of its so-called ­disrupters.

He’s spot on with the first point. “Disruption” has been around forever. Gutenberg’s printing press of 1440 could produce 3,600 pages per day, compared with the 3 pages that a Benedictine Monk could hand write on a good day. You think that you are under pressure – spare a thought for the Abbot of a 15th Century Monastery in the Bible making business. That’s disruption!

Disruption (and the failure to spot it) has always been an excuse for failure.

It’s not just Digital Disruption – it’s not just new Business Models. Everything is connected.  It’s a mash-up of New Technology, How work gets done and changes in Mood & Meaning. New Business Models are copied and pasted from industry to industry, country to country. Everyone is learning – from failures as much as successes.

I agree that “banking will not die” BUT it will be sliced up into a million bits and become more “open” so that the “big banks” will continue to decline. I’m calling it “PeakBank”.

Here are the factors underpinning a PeakBank scenario:

Loss of Trust

Rachel Botsman (Collaborative Consumption) has called it. Craigslist founder Craig Newmark has called it. In the past 20 years or so we have seen a transferral of Trust from Institutions to Individuals. Hands up who trusts their bank more than they did 20 years ago ? Nobody.

Zopa – a UK based peer to peer lender has won Moneywise “most trusted personal loan provider from 2010 to 2015”.

A young, online lender is more trusted than a range of 100 + year old banks. Go figure.

Social Licence trumps regulatory licence

One of the factors behind Uber’s rise is that we have lost trust in the basis of the taxi industry’s  regulated monopoly. We don’t believe them and we don’t respect the rules that are designed to protect them not us. Could we say ditto for many banking rules. Too big to fail ? In need of a government guarantee on deposits ? WTF ! Big Short anyone ??

Blockchain

Blockchain is the underlying technology of Bitcoin, the virtual currency. Whilst Bitcoin might not survive, Blockchain is set to be disruptive on a massive scale.

In simple terms it enables secure, information rich transaction between “peers”, lowering the cost and increasing the speed of sophisticated transactions.

Blockchain (or some derivative) is going to provide a big key to disrupting banks. It’s hard for a StartUp to get a banking licence. But what if you don’t need a banking licence – what if you just need to use endorsed transaction mechanisms ?

Lower cost of StartUps enabling  a swarm of competitors

Cloud technology and new work models are enabling StartUps in many industries to launch with a fraction of the capital of just a few years ago. If the barriers to banking licences are lowered or new “agency” models emerge a key StartUp cost will be lowered. Given the profits to be had – the risk / return equation has changed. That’s why we’re seeing an explosion of Fintech. Most will fail but a few will succeed on a big scale, many more within a customer segment or a geographic region.

Banks face a “piranha school” of competition. A little Fintech nibbling on their toe, another one on the wrist, another on the elbow. All with different offers to different customer segments. Deep, customised offers. They will not be able to compete on hundreds if not thousands of fronts at once – with many customers having “opposite” offers – completely opposite to the Bank’s customer proposition.

They will get sliced and diced – one customer at a time.

 

Legacy Cost Structures

At it’s peak (in 2004)   Blockbuster US had 9,000 high street stores and 60,000 employees. The Netflix DVD business had 42 logistics centres – in cheap sheds in low rent areas.

Smells like Big Bank versus Fintech to me. Blockbuster was a simple, single offer business and only faced one Netflix. One was enough. Banks are big complicated businesses trying to do a gazillion things. What if they faced a Netflix like Fintech on each of their segments ? It’s not easy to unravel a big legacy cost base in a hurry. They cannot be agile with the cost bases that they have.

Less need for debt

Apart from all of the smarty pants “virtual instruments” that the banks dreamed up – which are in the process of being unravelled – ultimately there has to be some link to the real world. The world is already awash with debt that needs to be repaid

The banks face serious headwinds in regards to the demand for debt.

The growth in the “access not own” mindset will see us need fewer cars and other consumer big ticket items.

When you can 3D print a spare part in metal on a remote mining site – you are changing supply lines, logistics and business models.

Fewer warehouses to fund and less inventory to fund.

Technology enables easier “consignment” of stock – suppliers funding inventories until the instant of sale when title passes.

Blurring of debt & equity

There’s debt and there’s equity and there’s stuff in the middle like convertible notes – debt that can become equity.

I’m predicting the emergence of new forms of bonds, notes and paper where investors (institutions or individuals) will provide debt directly to organisations of all sizes. We’ll see crowd-funded equity, debt and convertible instruments.

New online platforms that will lower the cost of transacting and enable new markets.

Artificial intelligence and “risk sniffers” will risk rate SME’s by looking over their daily Xero transactions (by invitation) to detect fraud and confirm that their payroll and statutory obligations are being met.

Do banks have a natural monopoly on any of this ? I don’t see why.

Peer to Peer

If a person (or people) with money can efficiently transact with a person who needs money – why do we need Banks ?

 

Specialisation / segmentation of customers

Name an industry of any size and we will see specialist global lenders emerge that will tailor an offer to exactly fit the needs of that industry – they will have an amazing “fit for purpose” offer that will be a no brainer for many target customers.  A Bank with a vanilla debt and customer service offer will struggle to compete with a myriad of customised products & services.

 

Granular transactional transparency

One of the interesting things about Peer to Peer lenders is their transparency. Zopa for example has made their entire (de-identified) loan book public. Every loan that they’ve ever done, updated on a monthly basis.

It was George Soros who spotted that the GFC could have been avoided if Institutions had to guarantee bundles of mortgages that they on-sold and each mortgage was separately identified and could be transacted individually. You know that those loans were often worth cents in the dollar. But the person with the most interest in purchasing the debt at a discount (the home borrower) could not transact. What if they could have bought back their home loan at a discount ? You could bet that the losses would have been a lot less.

 

Summary

Sorry Mr Gonski your bank probably won’t die BUT it will never be any bigger.

Your bank will lose customers one at a time to competitors with offers much more tailored to each customer.

The questions I’d be asking the ANZ Board would be : What could you be the best in the world at ? and with which customer segment ?

Just being “ok” in Australia with a bunch of vanilla products & services won’t be good enough.

We’ve arrived at PeakBank. Things will never be the same again.

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