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Bank or IT? - You Decide!

I don't know if you've noticed, but we've been upping our 'innovation' coverage over at Finextra Towers. Don't worry, we still have a lot of love for the dark suited, world weary IT and business types fighting the good fight against legacy infrastructure, regulatory mandates, shrinking margins and an increasingly fickle customer base. ("We want more personal service - we just don't want it in person.")

But we've started talking to a few more young dudes who sport t-shirts or don tweed hats and play around with code and embrace open APIs in an effort to offer banking and payment services to market segments that have been ignored by the traditional banking establishment. The so-called disrupters, the developers, the 'cool kids' who never consider Sepa or Basel III or Dodd-Frank when they break out their Mac books to build an mobile app that would allow people to donate small change to their favourite charities.

Maybe be they should...oh let's not get into that now.

Anyway, there is a lot of debate on the future of global financial services. One debate I hear quite often is: What is a bank? Is it a *duh* bank or is it an IT company? 

So far be it for me to decide for you, I would like you, our Finextra Community to hash it out - blog comment style. Come'on all you folks not yet on holiday... 

Are you a Bank or are you an IT company? 

Discuss... 

 

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Comments: (18)

Brett King
Brett King - Moven - New York 08 August, 2013, 16:15Be the first to give this comment the thumbs up 0 likes

This is a fair question. I was recently reminded by a VP at Oracle that BofA's annual IT spend exceeded the combined R&D budgets of Microsoft and Oracle. An argument could be made that this alone qualifies most banks as IT first, bank second. The problem is that most banks allocate a massive budget to just maintaining legacy infrastructure and staying compliant, without even getting into core system replacement, etc.

Even if you believe the assertion that banks being characterized as IT companies is absurd, the fact is that IT is much more fundamental to a banks operation than say an Airline or retailer. 

IT is now and for the foreseeable future a simple reality of the business and no bank is able to operate without IT being a fundamental component of the business. Does that make them IT companies? If you ignore the fact that banks have banking licenses and do banking the conclusion would undoubtedly be yes.Regardless. if banks don't start operating more and more like IT companies in the future I think it will hurt them operationally.

Brett King, Bank 3.0

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 08 August, 2013, 20:32Be the first to give this comment the thumbs up 0 likes

Having worked in the IT industry for 25+ years, I'll pull out all my money from banks and put them under my mattress if banks started working like IT companies. Anyway, my personal opinion hardly matters since a company is known by where it earns its money from, not what it spends its money on. By that count, banks are, *duh* notwithstanding, banks, not IT companies. While IT plays a strategic role in many areas of a bank, it's still a support function.

John Bullard
John Bullard - BullardCo - London 09 August, 2013, 08:30Be the first to give this comment the thumbs up 0 likes

It depends what you mean by a bank.... there is a way of looking at the business of banking as being Risk Management/Mitigation/ Intermediation (pick any one but they are all about Risk/Liability etc) in 3 distinct areas: namely i) Credit Risk (being the acceptance of deposits and the lending of money) ii) Capital Market Risk (being trading etc either on the banks account or for large clients across Capital Markets- this incl "Investment Banking" etc) iii) Operational Risk Management- this is about transactional risk- the movement of bits and bytes representing value across electronic networks; whether those bits bytes represent money (ie a payment), or a document (eg a contract) is actually immaterial- they are still bits 'n bytes. A bank probably comes closest to being an IT company in (iii)- but "payments" are still seen by society (and by regulators) largely as something "banks" do- although of course that perception is changing.

Final point- whether in i) ii) or iii) there is a single common denominator without which each one will crash- namely Trusted Identity- can I be sure that my counterparty really is who he/she says they are..... and that the bits/bytes get to their destination privately and unaltered...... And if there is aproblem, where do I go for recourse...an IT company or a Bank ? ...I know which I would choose.....  All of which which takes us back to why banks and trusted digital identity are so important to each other in a borderless world of public ubiquitous and instantaneous electronic networks....... JGB

Simon Barrows
Simon Barrows - Archioptiryx - Godalming 09 August, 2013, 10:03Be the first to give this comment the thumbs up 0 likes

An IT company, no. A company whose primary business currency is Data (the management and exploitation of which is fundamentally supported by IT), yes. That's what I think anyway!

A Finextra member
A Finextra member 09 August, 2013, 13:27Be the first to give this comment the thumbs up 0 likes

If banks were really IT companies, this blog would have a "share on Reddit" button, not a "share on Digg" button..

Elizabeth Lumley
Elizabeth Lumley - Girl, Disrupted - Crayford 10 August, 2013, 14:35Be the first to give this comment the thumbs up 0 likes

Ah, good catch. You can share our videos, news stories and announcements on reddit (in fact we get a lot of traffic from reddit). But the Blogs (or community section as we call it internally) is going through a redesign at the moment. Our web guy is waiting for the redesign to be finalised and launched, before the 'sharing' buttons are added. 

My 'thoughts' on the debate will be coming soon. 

A Finextra member
A Finextra member 12 August, 2013, 00:29Be the first to give this comment the thumbs up 0 likes

Banks are not IT companies, they do not sell or make information technology. They are however information systems, because they sell bits not atoms. As public cloud increasingly separates the technology infrastructure ('tin and wire') from the information system (that manufactures, distributes and services the banks' products) it will become clearer that this is the case. Eventually all the banks' will run all their information systems on someone else's TI and no one will think they are IT companies any more.

A Finextra member
A Finextra member 12 August, 2013, 10:49Be the first to give this comment the thumbs up 0 likes

I bet there are a good few bankers who'd like the answer to be an IT company, as then they'd have far fewer and substantially less onerous regulations to worry about. Which, as you've intimated, may be the fulcrum for the whole of this discussion.

Elizabeth Lumley
Elizabeth Lumley - Girl, Disrupted - Crayford 14 August, 2013, 14:26Be the first to give this comment the thumbs up 0 likes

A bank takes desposits and is highly regulated (When I say 'highly' I mean, mind-numbingly, fucks-with-you-head than runs off with your daughter REGULATED).

A company that deals with payments or transactions or deals in any border-line financial advice, platform or helps to crowdfund your rude ceramics business with bitcoins, which does not have a banking license and is therefore (see above) not highly regulated - is not a bank. 

Banks heavily rely on IT to support the (banking) business. This does not make them an 'IT company' This makes them a bank, with a (delete where apporpriate) innovative/incompetent IT company inside it. 

A cat dressed as a shark riding a Roomba is not a shark. It is still a cat. http://www.youtube.com/watch?v=tLt5rBfNucc

Peace out

Brett King
Brett King - Moven - New York 14 August, 2013, 15:13Be the first to give this comment the thumbs up 0 likes

Finextra's next move is Cat videos I'm guessing...

@Liz

Of course, you are correct that a bank is a bank, and even if 90% of the staff are IT related (10% compliance I'm guessing) then you're still a bank!

Yes, but the lines blurr when most of these big banks have bigger IT teams than the likes of Oracle, Microsoft, etc. If it quacks like a duck... it's not a cat.

The reality is that banks will actually be far more efficient ultimately if the operational side of the business is run as an IT company, with the banking component as the business overlay to that structure. The more banks insist on a bank organization structure that biases AGAINST technology, the more a bank will be divided against itself.

A bank is a bank, but it must behave like an IT company to be efficient, while maintaining the compliance requirements of the regulatory environment. I probably don't need to point out that the only way banks can continue to be compliant these days is through tech. 

A Finextra member
A Finextra member 14 August, 2013, 16:16Be the first to give this comment the thumbs up 0 likes

It’s not as simple as ‘Bank or IT company’.

In the EEA, there is a properly regulated financial services space in-between banks and IT companies.

In the name of innovation on the one hand and consumer protection on the other, through the PSD, the EC created an intermediate category. The rest of the world largely still has just the two categories - banks and non-banks.

Execs from thusly regulated firms such as APIs and eMLIs get to go to the same jail as the bankers (missing an icon here) if they transgress. Many of them have invested in IT – and people - to perform processes like sanctions filtering, as a consequence. They are required to comply with some regulations (PSD2 SEPA younameit), and are precluded from getting involved in other regulated activity (e.g. deposit-taking).  Such firms do not belong in the same category as a short-term loan provider, crowdsourcer or Bitcoin operator (as distinct from a Bitcoin exchange).

Why is this relevant? If banks are to innovate, they can’t build it all themselves. And if they do, as we can see, they tend to lose agility. So I suspect we will see greater componentisation of business process. New banks will look to source common functions from utilities, and specialise. The model is well proven, e.g. clearing and settlement, albeit today largely in common non-differentiating backoffice services. Going forward I suspect newbanks, and old banks looking to innovate, will insource services which are closer to the client.

Cats can change the status quo

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 14 August, 2013, 16:39Be the first to give this comment the thumbs up 0 likes

To this small, but growing, collection of folk sayings, let me add one more:

You can put lipstick on a pig but you can't take her to the prom.

Leave it to all you readers to map it to bank / IT company whichever way you wish to!

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 14 August, 2013, 20:14Be the first to give this comment the thumbs up 0 likes

With US$ 200B in profits, financial services is the most profitable industry in the latest FORTUNE 500 list. Therefore, in terms of running an efficient operation, banks should be the ones teaching other industries. Besides, when a bank enjoys the unique luxury of being able to "privatize its gains and socialize its losses", to quote a modern day saying, why should it lose that advantage by becoming part of IT or any other industry?

Brett King
Brett King - Moven - New York 14 August, 2013, 20:43Be the first to give this comment the thumbs up 0 likes

@Ketharaman

Sorry, that's not at all an accurate assessment of how the market sees and values banks, nor the value creation offered by banks.

Because of risk mitigation and the cash reserves banks have to carry, their multiples are typically much, much lower than IT companies. That is a measure of organizational efficiency. 

AAPL alone made $41Bn in profit last year compared with $4.2Bn for BAC, or $43Bn for BAC, WFA and JPM combined.

However, a much better way to look at this is simply Earnings per employee.

BAC, C, JPM, WFC Earned $51Bn in profits with 1.051 Million staff for a total earnings of $48.5k per employee

Comparatively

GOOG, AAPL, MSFT, ORCL Earned $84.7Bn in profits with 342,000 staff for a total earnings of $247.8k per employee

Banks are simply not efficient organizations compared with IT companies. 

 

 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 15 August, 2013, 10:05Be the first to give this comment the thumbs up 0 likes

I've seen metrics like EPS, P/E, PEG, RPP and so on used to compare companies within a given industry. Not sure which segment of the market considers Earnings Per Employee as a relevant metric since a leading source like FORTUNE 500 has stopped reporting # of Employees, let alone Earnings Per Employee. 

Nevertheless, it's good to know that IT ranks above banking on that metric. Although I'm keen on knowing the impact on that metric when HPQ, the #2 IT company, enters your calculations, along with its whopping US$ 12.65B loss. 

Meanwhile, profit is understood by everyone and it's used by FORTUNE 500, the world's #1 cross-industry list. That makes profit a good enough metric for assessing efficiency or value or value creation or whatever else that matters to the market. On that count, banking is #1.

A Finextra member
A Finextra member 15 August, 2013, 13:02Be the first to give this comment the thumbs up 0 likes

there are folk who would argue that short-term profit alone isn't a fair measure...

the banking crisis has been as bad for the economy as a world war

'in the summer of '82, large American banks lost close to all their past earnings (cumulatively), about everything they ever made in the history of American banking - everything'. Nassim Taleb, the Black Swan.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 15 August, 2013, 16:52Be the first to give this comment the thumbs up 0 likes

While folks keep arguing about what is a fair measure and what is not, banks go laughing all the way to the - er - bank.

Some might argue that, with more than 50% of its revenues coming from mobile phones and music players, $AAPL is a consumer electronics, not an IT, company. But, that hardly matters. What does matter is what an industry standard like FORTUNE 500 says. And it says that AAPL is an IT company. So, the market accepts that. It also doesn't report Earnings Per Employee. So, the market ignores that - at least I don't know any market that finds that relevant.

João Bohner
João Bohner - Independent Consultant - Carapicuiba 31 August, 2015, 21:04Be the first to give this comment the thumbs up 0 likes

 

Decisively and definitely BANK!

The problem today is that banks are spending 'tubes' trying to maintain a very old architecture (if any), making their IT areas larger than many IT companies!

I'm an 'architect in processes' expert.

I'm working on a project which proposal is precisely to reduce the gargantuan costs of the IT of Banks at least 10 times!

This project shakes a lot the current 'Core Systems' by reshaping the way transactions are processed at back office.

And, yes, this is feasible!