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Silicon Valley vs. Banking - No More Fog of War

We all know there's been a battle brewing for a while.

Silicon Valley, with its innate ability to innovate around technology and build models for deepening customer relationships, has been squaring off against traditional Main Street banking, threatening a fight for a few years. 

The big banks aren't a pushover, they have balance sheet (but perhaps not market cap) and a trusted relationship with their customer (although there's been some volatility there), that is nascent with Facebook, Apple and the Google.

But, while Google and Facebook find out more about what makes us tick at a frightening pace, the Banks still haven't made a play. Yes, they have a "Digital Strategy", but almost without exception, banks are furiously turning the handle on yesterday's business model like every other industry that got caught in the Silicon Valley tsunami of disintermediation (broadcasting, music, film, retail etc).

According to Wikipedia, "The Fog Of War" is the "uncertainty in situational awareness experienced by participants in military operations. The term seeks to capture the uncertainty regarding one's own capability, adversary capability, and adversary intent during an engagement, operation, or campaign."

In September 2014, the fog in this ware cleared. A few things happened that make it quite clear who has what capability and what their intent is. Let's look at what happened...

Hidden amongst the glitz and glamour of their September 9, 2014 iPhone and Apple Watch event, Apple launched Apple Pay. My response to the event - "Apple just killed cash". According to BusinessInsider, Apple have over 800m verified credit cards on file - that's four times the number of credit cards Amazon have registered.

Apple Pay on its own is interesting. Add to the mix an authentication and non-repudiation device that is just as important as your wallet when you leave your house (the iPhone) and a device that is soon to be (perhaps) strapped to your wrist (the Apple `Watch). Apple is now in pole position to kill cash, the credit card AND the bank.

Apple's only Achilles Heel, is its ability to remain trusted. It won the old personal device war by showing how magic can happen by closely integrating hardware and software design. The new personal device battleground will be won by those who can reliably integrate hardware, software and cloud services. Apple's track record with MobileMe, iCloud and recent security breaches put it at a disadvantage in this regard.

In other news, it's not a coincidence that on September 30, 2014, eBay announced their intention to finally spin-off PayPal. Rumour has it that Apple were in talks with PayPal to be a transaction processor for Apple Pay. However, those talks were cut short in typical Apple style, when it became clear that PayPal were working with Samsung on payment processing for its range of phones. Whilst the deal isn't done yet, it looks like the only option to keep PayPal viable. The spin-off leaves eBay with a problem as PayPal made up 40% of it's revenues last year.

A PayPal unconstrained by eBay puts up a challenge and a useful second choice to Apple Pay for next-gen payment processing. However, this humble consultant making his way in the world is betting that PayPal won't be independent for long. Google and PayPal would make for a powerful combination and offer real competition to Apple Pay.

So, what are the banks doing? It's hard to see that they are doing anything as material and decisive as Apple and PayPal. The announcement that Capital One has acquired design firm Adaptive Path is interesting, but acquiring is different to doing.

I'm watching with great interest at what happens next in this space. If I were to predict which of the UK banks will move most quickly and decisively, I would be backing Barclays. Their new CIO, Michael Harte, has a long list of credentials when it comes to taking what's best of Silicon Valley and bringing it to banking. And he won't be shy in going head to head with the tech firms.

We live in exciting times. And the war on payments are just the beginning. FX will be next and will be assimilated quickly. Musings on that next week.


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