I spent most of this week at Money 20/20 in Las Vegas. The show continues to grow— 10,000+ attendees this year— and it continues to be a magnet for banking and payment executives, merchants, fintech entrepreneurs, investors, analysts and plenty of commentariat on all such things.

With more than 550 (!) speakers at Money 20/20, the content was uneven, as one might expect. For every thought-provoking keynote like that of Patrick Collison, CEO & Co-Founder of Stripe, there were plenty of ho-hum recitations of corporate press releases.

“Most People are building cars (FinTech products). We are building Roads.”

– Patrick Collison, via Sam Maule 

And, for every standing-room only panel session like this one, there were droves of drones, droning on.

Standing room only with future of payments panel with Facebook, PayPal, Western Union, AliPay, Vantiv #money2020 pic.twitter.com/D0GYjbecSs

— Bradley Leimer (@leimer) October 26, 2015

Merchant and Issuer Collaboration

Following Capital One, Chase announced its own mobile wallet app. Chase’s announcement marks their efforts to build an early bridge between the deeply divided camps of merchants and card issuers with the mobile payment solution Chase Pay.

Chase Pay, which will work on “virtually all phones”, enjoys the backing of the merchant consortium MCX, which includes some of the largest retailers in the world, including Walmart, Target and Best Buy, but most early assessments are less than enthusiastic about the customer experience, centered around QR codes. We’ll keep an eye on that, but it does bring one of the largest credit card issuers and payment processors in line with a huge number of merchant customers, and it was hard for me to see how MCX’s CurrentC was going to get traction with consumers.

Collaboration at All Hours

But great conversations were happening everywhere, and not just on stage — in the hallways, in the restaurants and bars, at the casino tables, at private meetings, and at the parties. At Money 20/20, there are always the parties…

Money 20/20 is where kids who were home-bound homework-slaving nerds go to feel like the cast of Entourage.

“Hey, are you going to the Wyclef Jean party at the Tao Beach Pool?”

“Right now I’ve got to drive some Ferraris and Lamborghinis around, and then I have a dinner at the Eiffel Tower restaurant, but I’ll try to swing by later if I can.”

Wyclef Jean at #money2020. Because Conference. pic.twitter.com/BK08H94dpA

— Julie Schicktanz (@JulieSchicktanz)  October 27, 2015

Had an amazing event last night with @MXenabled. Everyone was able to drive Ferrari’s and Lamborghini’s. #Money2020 pic.twitter.com/3Lify426aa

— Matt West ️ (@Matt__West)  October 27, 2015

 

Bank and Fintech Collaboration

#money2020 – Lloyds: “Winning fintechs will realize that to scale, they need to partner w/ banks & winning banks will partner w FinTech”

 

— John Waupsh (@waupsh)  October 28, 2015

Lien was speaking on a panel which also included Phil Gilligan, Managing Director, Head of GTO Innovation at Deutsche Bank and Niki Manby, Chief Operating Officer at Citi Ventures. The panel was moderated by Chris Skinner and was titled Responding to Disruption: Are Banks Meeting the Challenge of New Competitors & Changing Customer Expectations?

As anyone who has read or heard me before knows, my answer to the rhetorical question posed in the Title is “Only a few”.

Leaders, Learners and Laggards

We continue to see a power curve distribution in the industry of Leaders, Learners and Laggards. Most are laggards. They think that innovation is for someone else, and they are smart by being “fast followers”. It might be smart, if they put more emphasis on “fast” instead of “follower”.

There is a small and growing group of learners— those that know they need to innovate, and have pockets of innovation, but also know they need to do more.

Only a relatively few financial institutions worldwide can be seen as leaders in innovation. These are those organizations that have both broad and deep innovation efforts, from the incremental to the radical, and they seek to embed innovation throughout the organization. They also connect and collaborate across a broad ecosystem that includes customers, vendors, partners and even potential competitors.

During the last 15 years, 47 fintech companies grew from startups to “unicorns” (valued at $1 billion or greater), with another 38 companies quickly approaching that level, as Jim Bruene posted to the Finovate blog. This has caught the attention of investors, who poured $12 billion of capital into the fintech space last year alone. Some of the more savvy bank CEOs are starting to pay attention too, as evidenced by JP Morgan Chase CEO Jamie Dimon’s pronouncement that “Silicon Valley is coming” in his annual letter to shareholders this Spring.

Mindless Myopia

Plenty of leaders still have their heads buried in the sand, though. I speak a lot about the need for innovation at financial services conferences, and I often ask for a show of hands to gauge the awareness of the executives present about some of the disruptive fintech companies changing their industry. The number of hands in the air is usually dwarfed by the numbered of confused looks and hastily scribbling pens.

Maybe they should spend more time on what’s happening outside and on the edges of their industry and less time worrying about the hierarchy of corporate dress codes. Except cool socks. Nothing wrong with cool socks.

Jim Marous at The Financial Brand reported on research by Adaptive Lab that showed similar results in the UK, leading to banks being “displaced, diminished and disintermediated”.

This myopia begins with an ignorance that is unnecessary, and often willful. Most of these companies are hiding in plain sight, but it is more comfortable to keep doing what you’ve already done. Despite popular belief, no industry is too big, too entrenched, or too protected by regulations to be disrupted. It’s too late, banking is already being disrupted.

This digital disruption is not just happening in financial services. During that same period since 2000, 52% of the Fortune 500 companies listed in 2000 have already gone away through M&A or bankruptcy, according to a recent report by the Altimeter Group and Capgemini.

Innovation to the Rescue?

The best way to predict the future is to create it; and other industries, especially those driven by technology, make regular investments in research and development to stay ahead of the curve. This has been virtually unheard of in financial services until the last few years, when the more forward-looking organizations began to establish innovation teams and programs.

Organizations that are innovation leaders treat ideas like assets— they actively acquire them, protect them, grow them, manage them in a portfolio to optimize risk and return, and monetize them. Innovation laggards treat ideas like liabilities— they avoid them when at all possible, and the activities they spend the most time on are geared to reduce their numbers and look for ways to get rid of them.

More importantly, the most innovative companies know that innovation is about more than the next big idea.

An idea itself is worthless.

An idea shared, built, tested, and iterated upon begins to gain value as it becomes infused with human potential.

Then, the real hard work begins.

Powerful corporate antibodies efficiently seek and destroy new ideas before they get too much traction. Budget guardians ensure that no funding is diverted from existing products and programs, not matter how long in the tooth they may be. The larger the company, the longer it has been around, and the more mature its industry, the larger and louder this group becomes. These Traditionalists think they already know what works and what doesn’t.

Until it doesn’t work anymore.

The companies that thrive during times of disruption make the tough decisions to redirect resources from legacy programs to new ideas that might help them invent their own future.

They know that innovation is more than just the next big idea.

Bankers may be taking undue solace in Chris Skinner’s April 10 American Banker BankThink post, “Like Airlines and Pharma, Banking’s Too Big to Disrupt.” I was party to the specific round of sparring he cites in his article over whether financial technology startups will overthrow the banking industry. And although I agree with many of Mr. Skinner’s points, he discusses several ideas that merit further exploration.

First is the meaning of the word “disruption.” To say that banking is being disrupted does not necessarily mean that the entire industry and all of its current participants will cease to exist. Disruptive innovation simply changes the game by creating new markets and new relationships between organizations and individuals, and that is already happening.

Hollow Inspiration

A long and storied history does little to protect incumbents against truly disruptive forces. The railroad industry, for example, is dominated by century-old players. Its high cost barriers to entry were further bolstered by tariffs, regional monopolies and political protection. But it exists today as a mere shadow of its grand past, largely because new forms of transportation decreased demand for railroad service.

One of those disruptors was the airline industry, which does offer a better comparison for banking than books or music, as Skinner points out. But the comparison is hardly an encouraging one. Airlines have low single-digit profit margins, generate returns below the cost of capital, and are highly susceptible to economic cycles. The result has been a string of painful bankruptcy reorganizations, layoffs and mergers throughout the industry.

Skinner also dismisses the idea that “some geek in a bedroom” could create the Uber of banking. But back in the 1980s, IBM probably thought there was no way some geek could eliminate their stronghold on personal computers. Yet that’s exactly what happened. Michael Dell famously started Dell Computer from his college dorm room. He became the youngest chief executive of a Fortune 500 company just eight years later. A dozen years after that, IBM got out of the PC business, selling it to Lenovo. And as the waves of disruption continued, Dell was later knocked off its own throne by Apple and other companies.

Banking, like airlines and railroads, is a mature industry. Computers and mobile handsets are too at this point. All entrenched players in these industries face battles for profit margins and further consolidation. But disruptive innovation makes those battles even harder.

Advance Warning is Not Protection

The incumbents argue that their longstanding positions will give them sufficient time to adapt and react to any disruption. But advance warning seldom provides disrupted incumbents with protection.

Kodak was not unaware of digital photography, but the company was unable to shift its legacy culture and operations quickly enough.

By the time Apple released the first iPhone in 2007 Steve Jobs had long progressed from the geek in a bedroom stage, but they seemed at the time just as unlikely to unseat entrenched industry leaders such as Nokia, Motorola and Blackberry

The banking industry as a whole will continue to exist. But how many individual banks will be able to make the necessary changes to stay relevant in a rapidly changing market? Not even the most disruptive of fintech companies is likely to single-handedly topple the entrenched mega-bank infrastructure, but these disruptions are slowly killing banks. At least some of them.

As I have written before, failure to innovate is never listed as the cause of death for banks. It’s just an underlying condition that observers discover in the post-mortem.

Time for Transformation

It’s true that good companies can and will survive. As Mr. Skinner pointed out, “some startups will eat some of the banks’ lunch,” while others will adapt. But rather than sitting back with a collective sigh of relief, bankers would do well to heed the advice that Mr. Skinner has written about extensively in many of his other articles and books: do the hard work to transform old infrastructures, cultures and business models.

It’s too late to argue that banking is too big to disrupt. The disruption is already happening.

_________________________

A version of this article first appeared in American Banker’s BankThink

Some of them, anyway.

You just won’t read that on their tombstones.

John Authers recently wrote an article in the Financial Times entitled “Disruptive technology will not kill banks” that was commented on by two people whose analysis and opinion I respect (Chris Skinner and Jeff Marsico). The subheading that read “Banking is too heavily regulated to be threatened by newcomers”

Marsico’s take in his own blog post on the topic is that bankers are doing just fine killing banks on their own. I often speak about how innovators inside (and outside of) banks need to fight through the Business Prevention Department to create new products and new ways of doing things. I also talk a lot about how banking is one of the last businesses still trying to compete through a gatekeeper model, while the world is growing increasingly open-sourced, crowd-sourced, social and collaborative.

I asked a group of participants at a recent workshop I was facilitating if they could think of any other industries with gatekeeper models that have been disrupted by new entrants. A newspaper journalist in attendance chuckled sardonically and said “Yeah, mine”.

The Business Prevention Department in newspapers must be very proud that they are now embracing fancy digital technology to make sure that no one can sneak past the gates to be exposed to their ideas, or even, you know, their ads, without first paying the price of admission. Even the newspaper’s website from my childhood home of Canton, Ohio (2010 population 73,007, down 9.7% from 2000) warns me with pop-ups that I’m nearing the end of my five free articles this month before I’ll have to pay for a subscription. I think I can live within those limits.

Banks or Banking?

But back to banking… The FT’s subheading, “Banking is too heavily regulated to be threatened by newcomers”, is far different than the headline, “Disruptive technology will not kill banks”. Chris Skinner wrote from last week’s Sibos conference in Boston that “We’re not being disrupted, just rearchitected”, and his view is that the reconfiguration of business models and structures from within are making more profound, if incremental, changes than those coming from the outside.

Fair enough, but those internal changes would not be happening at all if it were not for the disruptive external stimuli forcing that internal response.

False hope

I cannot foresee any time during the next half-century,at least, where banks fail to exist, some form of regulated intermediary between depositors, borrowers and remitters. Some day some form of digital cash or crypto-currencies might change that, but I cannot foresee any time during the existence of humankind that banking will fail to exist. Some form of value exchange will always take place, but we may not always need all of the current financial infrastructure to make that happen.

I worry that this distinction is lost on far too many bankers, and that too many of them scoff that rumors of their death have been greatly exaggerated as they read articles like that in the Financial Times’ in the walnut-paneled libraries of their local private club.

Small island in a vast sea

I spent the better part of the last five weeks on the road, meeting with bankers, entrepreneurs, investors, analysts and journalists in financial services and FinTech. From intimate Bank Innovators workshops with banks ranging from $330 million community banks to $2.2 trillion global banks, to FinTech demos at Finovate to the massive global banking conference that is Sibos, complete their own embedded rebel camp, Innotribe.

I met some new people from all over the globe, but I also saw a lot of old friends, and I remarked to several on the good news/bad news of that. The good news is how so many of us who seek and instigate change in financial services tend to know one another, and it’s a group I always enjoy being around. Many are fellow ‘recovering bankers’ who are finding it easier to change the industry from its edges. They are unfailingly smart, insightful, energetic, proactive, kind and helpful.

The bad news is that it’s a relatively small island in the vast sea of hidebound bureaucrats that are far too heavily invested in maintaining the status quo to notice the disruption happening all around them.

Unattributed cause of death

None of the thousands of cool FinTech doodads and thingamajigs that we are currently tracking are likely to single-handedly topple the entrenched mega-bank infrastructure, and as Chris Skinner puts it, ” There is no next big thing… get over it“. But these external changes are killing banks. At least some of them. It  just won’t be written on their tombstones.

Every year we continue to have fewer and fewer banks and credit unions. The number has been cut in half over the past twenty years, and it will likely take only five years to cut the number in half again. Bank M&A is heating up again, and market share in loans and deposits continue to accrue to the larger banks, and increasingly, to non-bank competitors.

No one will cite “lack of innovation” or “lack of technology” as a reason for selling their bank, but as they fail to meet consumers’ (and businesses’) rising expectations, their stagnant growth will lead to more sales to more capable hands. There are a lot of reasons why banks sell out to acquirers, but in the final analysis, the sellers’ board and shareholders vote that another management team could likely do a better job.

An increasing number of today’s consumers carry a powerful super-computer in their pocket, order merchandise seamlessly with one click and have a world of entertainment choices at the swipe of their finger. They aren’t willing to take a trip down memory lane just to complete a banking transaction that was designed in an era of paper and mainframes (if not ledger books and quill pens).

Yes, banking will survive. But will your bank?