For those who have been living in the Outer Hebrides inside a cave for the past 10 years, this essay does not apply. For most of the other denizens of this country who are connected to the internet, PayPal would be familiar term. In any case, Paypal is an online payment system which is used for online electronic transactions, primarily on EBay. And according to a recent report, it is the most popular online payment service in the UK, which had nearly five times the number of unique visitors to its site compared to the second best one.
How on earth did an e-commerce site get to be on top of the pile? Surely financial institutions should be wiping the floor of these e-commerce sites? Well, yes and no. What lessons can be learnt and what does the future hold? Here's a wild stab at it.
In five or ten years time, I would not be surprised to read headlines such as:
- GooglePal makes a hostile bid for HSBC'Citi'Santander bank!
- European Union Regulators reviewing financial consumer protection laws in MySpace.
- Remember the day you had individual bank accounts instead of the current single electronic government account?
- Quantum computer social networking virus attack wipes out the government reserves of Belgium.
- Pensioner reports '20 zillion transferred into her bank account.
- A physical paper cheque dated 23 February 2008 was sold for '10.000 at Sotheby's
Ok, admit it, you smiled and thought, Herr Professor Dr. Bhaskar Dasgupta has gone around the bend. But hey, if I was reading headlines like, the PayPal site is five times more popular than the next one (which is unfortunately owned by a bank) in say 1995, I would have laughed as well. But despite the internet crash, the public have voted with their feet. PayPal has 20 million accounts in the UK, it processed '24 billion of payment volume globally in 2007 and over 100,000 Web sites now accept the service. If you ask me, that is a good sized bank. That is a very big chunk of the consumer market and something that is growing at double digit numbers every year. Commercial and Consumer banks / financial institutions will be weeping into their macchiato's to get even a quarter of that kind of growth rate.
As I keep on telling my graduate recruits or as I say in class every year, the role of an intermediary is to be intermediated out. A bank is a financial intermediary and all it does is to make sure that the pipe between people who have money and people who want money is clean, efficient, effective, safe, etc.. And just like a mousetrap, if you build a better mousetrap, then the customers will flock there. What technology is doing is to make the pipe construction and operation commoditized. As can be seen, PayPal did it. The entire value chain of account opening, payment processing, regulatory and customer reporting, lending etc. is pretty much standard and commoditized. So what exactly is the value that the banks are adding? Not much, is there?
I can see you jumping up and down and saying, hey, lets move up the value chain and move into corporate or investment banking or even trading. Well, I have news for you. By 2010, 75% of all foreign exchange trading will be electronic, while last year, it was almost 60% already. How about the fact that only about 20% of equity trading in the US was done in the old fashioned manner using the phones last year? (And is still falling rapidly).
So, basically, if you do not have a handle on technology and are not nimble enough, your customers will be deserting you, regulators will be piling on more and more costs and pressures on you, while technology is allowing new competitors to steal your business away from you. I have realized one thing after almost fifteen years in this area, innovation will not come out of the current banking structures. It is impossible given how the regulator regulates the industry, how the industry is structured, how the capital is deployed and how the products are constructed and made.
One or two might come out, but on balance of probability, the way the financial market is structured, it simply will not be possible. The current financial industry will become utilities, like the ones who provide water, sewage, electricity etc.. Regulated to hell and beyond, thin regulated profit margins, huge infrastructure costs and basically as boring as dried up and chewed biro pens. There is only one way to do so, which some banks are already starting to implement (such as the Citigroup investment in Lava and the RBS investment in WorldPay). Create a Special Purpose Vehicle or invest in a firm which is independent and far from the dull boring old gits in charge of the bank. Get it to invest and run disruptive technologies, processes and organizations within the financial services world, but stretch out to e-commerce and technology worlds. Then the challenge is to bring that disruptive technology inside the bank, but that's for another essay.
And the opinion which I have and the advice which I gave above? Chances are greater than even that it is totally rubbish. As Niels Bohr said, 'Prediction is very difficult, especially about the future' and I tend to stay away from difficult stuff. But then, if you do want to get a principle to work by, work on being very agile, flexible and change welcoming because 'It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.' (Charles Darwin)
(Disclosure: I work for one of the banks which is competing in this arena)
All this to be taken with a grain of salt!