In the Times business section in the UK today, Andrew Haldane, the Financial Stability Director for the Bank of England was quoted as suggesting that we are entering a phase where the banking sector is being reshaped as a result of technology. Haldane pointed to innovations like Kiva, P2P and social collaboration as some of the forces effecting the sector. However, his most telling quote was one that will sound familiar if you've read my blogs before...

"The banking middle men may in time become the surplus links in the chain. Where music and publishing have led, finance could follow"
Andrew Haldane, Bank of England

I wholeheartedly agree with this sentiment. In fact, I would argue the action in the payments space and around the wallet is exactly the type of activity that will further commoditize banking utility.

Liz Lumley argued passionately this morning within the Finextra community that the 'rails' or incumbent networks and infrastructure is exactly the layer of capability or functionality that enables these new disruptive payment technologies, or these new non-bank FIs to succeed. And she is absolutely right.

While the likes of Square, PayPal, Mobile Network Operators and others might think they can circumvent the current bank and payments infrastructure with the 'cloud' or IP networks, the reality is that the need for auditability, security and cross-border interoperability means that complete circumvention of the banking system isn't going to happen in the next few years.

However, that's not the point.

The New Value Layer

Movenbank, Simple, PayPal, Square, Dwolla, BitCoin and others are working at disrupting not the networks or infrastructure, but the friction in the system. As a group we're attacking the shortcomings in the system from a consumer experience perspective. Despite incremental improvements in technology interfacing through internet banking and the like, parallel changes in KYC, risk, regulation and other broad industry moves have had a net negative effect on banking for the consumer. 

In years gone by, the local branch experience was superior to the impersonal, by the numbers, decentralized processing experience we have today in the retail FI space; this is down to the fact that risk mitigation and profits became the driver in recent decades - not customers (blame regulators if you like). While we can say we measure customer satisfaction and so forth, on a net basis, customer experience is far less personalized than it was in the past.

Technology is circumventing the friction, the fuss, the workload, the processes and the rules that frustrate the consumer experience. Thus a new layer of value is being created on top of the existing infrastructure. Consumers are flocking to these new value creators not because of the underlying infrastructure that banks and networks provide, but because of the value and experience itself.

Thus, in the end when it all washes out - there's value and there's infrastructure. 

We don't need every bank and network - just a few

The problem for the banking industry is that for the new value creators, we only need a few players to provide infrastructure. The rest become obsolete because they no longer provide value.

While many argue correctly that the new players sit on top of existing infrastructure to build their businesses, what they neglect to address is that we probably only need 30-50% of the players in the system right now to provide that vital infrastructure. The rest are superfluous.

If you're an incumbent - you better start figuring out how you provide value to new players on top of the infrastructure. Otherwise you might find out soon that you're more like a Borders or Blockbuster than you think.