I recently read an article called the “Top 10 New Players Competing with Banks“, which in part inspired me to write this, not least, as it’s clear to many that some new “players” are not just competing with the banks but redefining the playing field and promising to disrupt the banking system as whole.
Caveats: 1. I’m not a financial expert or an economist and so I write in very simple terms. 2. I’ve included a lot of the large scale well known examples because size helps to show that the threat is credible but for each well known player there’s a diversity of hundreds, and sometimes thousands, of innovators and players at all scales. 3. Each individual player comes with a set of intrinsic problems or dependencies on the existing banking system but that’s not really what’s important. The key here is that when you patch work together a collective picture of players you may start to see fundamental disruptions to the banking industry.
Here’s a simplified list of the standard activities of banks, which is used throughout this article to see which areas are under threat. Traditional banking activities include;
1. enabling of payments
2. accepting deposits
4. loaning money
5. and the loaning of money leads to the creation of money
Key banking activity under threat: 1. enabling payments
This is one of many new entrants in the enabling payments technology explosion. Others include Apple Bank and Amazon Payments. Initially this is seen as competing with front-end payment services, which are dominated by Visa, MasterCard, Amex and more recently PayPal.
Many do not see this as a threat to traditional banking as it is dependent on the core rails of traditional banks. However, as banking goes more and more virtual, Google’s proximity to consumers at the point of consumption means that it has a market advantage and with its size and scale it could easily side step into other banking activities too.
Additional info: The only thing stopping these players from cutting out the back-end players is the question of volume and the problem of getting the cash in and out.
Key banking activity under threat: 1. enabling payments, 2. accepting deposits and 4. lending money
M-Pesa (M for mobile, pesa is Swahili for money) is a mobile-phone based money transfer and micro financing service for Safaricom and Vodacom. Over 70% of households in Kenya use this service for transactions. It’s currently seen as complementary to existing banks and services with many of the poor unbanked and rural populations who use the service as medium of exchange. They can use it as a bank account saving small amounts of national currency as phone credits. It also enables you to access micro credit products (loans) of a minimum of Ksh.100 any time and receive your loan instantly on your M-PESA account.
While currently limited in use the very idea and simplicity of mobile phone credits as currency has significant potential given wide spread use of mobile phones.
Additional information: 10 Things you need to know about M-pesa.
Key banking activity under threat : 1. enabling payments
Square is a physical extension for mobile phones to read credit and loyalty cards. While the new big players (like Apple and Google) clearly have the opportunity to reach scale and fast within the “enabling payments” market, Square and other technologies like it, shows that small scale operators can enter into this financial market offering the possibility of greater diversity and they can reach the sizable SME market. This type of technology and other innovations also opens up opportunities for social entrepreneurs to set up local currencies that use digital payment systems enabling them the possibility to bypass the need to create an actual physical currency.
Additional information: Square disrupting the payment experience
The Prodigy Network
Key banking activity under threat: 3. investing, 4. loaning money and the 5. loaning of money leads to the creation of money
The Prodigy Network is an example of crowdfunding. Crowdfunding is the collective effort of individuals who network and pool their money to fund a specific product, project or organisation.
Crowdfunding is well known for enabling small-scale projects but this example, shows that you can also source funding for major real estate and specifically “the biggest product in the world”.
In theory this approach doesn’t need traditional bank derived debt as the funds come from investors therefore circulating money that already exists in the system rather than creating new money through loans. Another great example of crowdfunding enabling significant projects without the need for debt creation is when consumers pre-purchased the Fairphone enabling the development of a smartphone, which could traditionally only be done made by tech giants.
Additional information: Building cities using the power of the crowd
Key banking activity under threat: 1. enabling payments and 5. the loaning of money leads to the creation of money
Bitcoin is a a peer-to-peer digital currency and a distributed monetary system that enables anonymous and relatively secure transactions without any centralized authority and bypasses the banks. It is not dependent on national currencies and isn’t introduced into the economy through bank loans like traditional money. It’s argued that Bitcoin proves that new forms of decentralised digital currencies can operate at scale.
Additional information: Interesting article on the future of digital currencies
Key banking activity under threat: 1. enabling of payments, 2. accepting deposits, 3. investing, 4. loaning money and 5. the loaning of money leads to the creation of money
Banco Palmas is one of over 100 community banks and community currencies in Brazil with many more in the planning. Some provide very similar services to traditional banks such as opening savings accounts and providing a place for local people to receive government aid and welfare payments. Like the M-pesa in Kenya these community banks operate in the peripheries and poorer areas where the traditional banks cannot afford to reach.
Brazilian community banks are considered to be complimentary rather than threatening to existing banks. However, their methods of micro-credit combined with a local currency and high levels of human scale support and community engagement is proving to be a powerful tool for community development and a demonstration of how to resolve critical local socio-economic issues with high levels of autonomy. They offer up an intriguing vision of the possibility of a banking system built on a completely different set of values at a time when ethical banks are seeing significant growth.
Additional information: The amazing story of community currencies in Brazil
Key banking activity under threat: 3. investing, 4. loaning money and 5. the loaning of money leads to the creation of money
Zopa is one of the many peer-to-peer lending platforms, like Funding Circle and others that completely bypasses the banks and enables people to borrow money. It utilises money that in many cases would be stuck in savings as surplus capacity and is already in the system and so doesn’t need to create new money as debt. It also enables peers to become lenders and gain interest on their loans or investments, which may be greater than the interest on savings.
Additional information: When speaking about peer-to-peer lending, the director for financial stability at the Bank of England, Andrew Haldane, said that he believes that “the mono-banking culture we have had since the 1990s is on its way out“.
Key banking activity under threat: 4. loaning money and 5. the loaning of money leads to the creation of money
Carsharing is a model of car rental, which is often called collaborative consumption, where people rent cars for short periods of time, often by the hour. Carsharing is symbolic of changes that are threatening not the banks exactly but the very growth economy that the banking system depends on. It’s estimated that one shared car removes up to 15 personally owned cars, which would have often been bank financed. City Carshare aims to remove 20,000 cars from the roads of San Francisco over coming years. Carsharing is just the tip of the sharing economy iceberg that is rapidly emerging.
While carshring doesn’t provide any direct banking services the current banking system is dependent upon continued growth in monetary consumption. Carsharing is just one example of the rise in the sharing economy. A growth in sharing undermines the growth in production of new goods. Which is not good for a banking system where 97% of money is created as bank derived debt, which is laden with interest, therefore the vicious cycle of more debt-based growth becomes obligatory in order to service the previous debt plus its interest.
Additional information: The rise of the sharing economy
Are these players disruptive?
To conclude i’d like to say that as well as banking specific innovations and the non-banking specific example of the sharing economy there are in fact many other similar trends that threaten perpetual growth and the banking system that demands it. For example;
1. the tendency to grow your own food, which is part of a wider shift in the western world towards prosumers or producer consumers where people produce more and more of what they consume rather than buying it
2. de-monetisation schemes that operate outside of the traditional economy like timebanks, gift circles, exchange markets, barter schemes and to some extent alternative currencies
3. planetary resource limits and climate change the subsequent need for energy and resource conservation where conserving and consuming less goes against the growth economy’s need to consume more
4. the growth and spread of open source ethics and approaches way beyond the sphere of coding and programming and into the wider economy where the very structures and approaches of corporations, banks, governments and other institutions are undertaking a forced transition towards more networked collaboration open structures that are proving to outperform traditional hierarchal closed structures
Its very easy to individually disregard any of these players as being insignificant or complementary to our current banking system but collectively the threat to banking as we know it is far greater than the sum of the parts and i’ve only just scratched the surface….
I wonder if the risk assessments of the big banks includes the risk posed by the growth of a community driven collaborative economy?
You may also like to read this article where i’ve considered the question of What is a Transition Bank?
Credits: Disruptive image : Google Images