The futurist: The death of banking
The industry as we know it is about to end
It was rather anticlimactic when it finally happened, but the front door simply failed to open.
There was no “going out of business” sale, no press conferences, no people gathered around to claim what was theirs. Instead, this once-bustling institution that built the tallest building in Cleveland, full of glass and fancy furniture, had breathed its last breath.
Make no mistake, the rich colorful legacy of the banking industry will fill countless future studies as people analyze and scrutinize past business dealings over the decades ahead; but the days of being able to walk into an actual bank building and make deposits and withdrawals just came to an end.
Far noisier endings had come a few years earlier in 2037 when Chase, Citigroup, Goldman Sachs and Wells Fargo closed their doors. But this last bastion of teller windows and hand written deposit slips, and the handful of aging customers who still frequented it, had been hemorrhaging cash for some time, and with this silent ending the banking era had officially come to a close.
When it comes to money, it’s all about trust. Once consumer confidence and trust begins to erode, it becomes a mammoth task to regain it.
Like many businesses of the past, the money world focused on people with money, leaving countess millions either unbanked or under-banked. But in a highly connected world, where every consumer has networks, influence and value, eyeballs count.
For some, banking leaders were the notorious puppet masters who manipulated the stock market, created new legislation, and made self-serving decisions that favored the rich and powerful at the expense of everyone else. To others, they were merely hard-nosed business people making the most of their position to keep investor returns high.
As an industry that had been artificially propped up with innumerable laws and a banker-friendly political system funded by banker-friendly rich people, the final days were delayed far past the time when the first foot entered the coffin. But all industries will eventually end, and this is the story of this one.
Is this a realistic scenario? If so, what are the key factors we should be paying attention to today? The answers will probably surprise you.
Banking, the Early Years
Lest we forget, the banking industry is a relatively young industry, coming into its own less than two centuries ago. Junius and J.P. Morgan were the father and son duo credited with bringing banking and finance to America. In the early 1800s, Junius Morgan helped George Peabody solidify America's ties with the capital markets in England. The English were the primary buyers of the state bonds being used to build up America.
In 1895, J.P. Morgan, took over the business and leveraged the relationships his father built to launch the U.S. into the industrial era at breakneck speed. Early Wall Street banks gave new meaning to elitism. No regular person was allowed to walk into the House of Morgan and open a bank account. Ironically, even as recently as 70 years ago, most banks simply refused to do business with the little guy.
The Beginning of the End
Early signs of trouble started to come to light even prior to the 2007-2008 recession, a recession many attributed to the shenanigans of key industry executives, none of which were ever charged for their role in manipulating the markets.
- In 2000 with the dot com world crashing, the Federal Reserve lowered rates 11 times - from 6.5 percent in May 2000 to 1.75 percent in December 2001.
- After the bombing of the World Trade Center in 2001, the Fed continued slashing interest rates to avoid a recession.
- In June 2003, the Fed lowered interest rates to 1 percent, the lowest rate in 45 years, creating a flood of available credit.
- Easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages the new gold rush.
- By 2004, U.S. homeownership peaked at 70 percent.
- Consumer demand drove the housing bubble to all-time highs in the summer of 2005, a bubble that ultimately collapsed in August of 2006.
- 2006 saw a 40 perent decline in U.S. home construction.
- During February and March 2007, more than 25 subprime lenders filed for bankruptcy and as home prices plummeted, the whole financial system started to unravel.
Similar to many other banks, HSBC reached peak employment in 2007 with 315,520 full-time employees, dropping to 208,000 in 2015.
The 2007 recession caused a total collapse of confidence and trust in the global financial system. But even more significant than the loss of confidence and trust, the entire financial system including every rusty bolt, nut, and overcharging scheme for consumers lay fully exposed for the world to see.
With political leaders racing to compensate for bad systems, adding layer upon layer of regulatory oversight, entrepreneurs everywhere suddenly realized how vulnerable the entire financial industry was.
Even before the recession, a number of startups in the financial technology, or “fintech,” space began percolating.
Good entrepreneurs have a way of sniffing out where money and opportunity coexist, and the banking-finance world was not shy about flaunting their lavish lifestyles and opulent trappings, revealing many of the underhanded dealings that made them rich.
Armed with a righteous contempt for old-school banking practices, a contempt that plays well in sound bites on social media, fintech companies began showing up in all aspect of the financial marketplace including exchanges, investment systems, networks, brokerages, research, and risk management.
Bitcoin, the mysterious godfather of cryptocurrencies was launched in 2009 with the promise of automating “authority” out of existence.
As we transition from national to global systems the concept of “authority” becomes a reoccurring theme. In this context, technology has changed the very definition of business, forcing regulators to reassess their own role and authority.
- Is Uber a taxi company or simply a “lead generation” service for entrepreneurs?
- Is AirBNB in the hospitality business or simply a “tenant finder” for the real estate industry?
- Are coworking operations part of the real estate industry or in the collaboration business?
- Is Lending Club a new kind of banking loan service or is it in the resource coordination business?
Emerging business models are rapidly showing how archaic and narrowly defined our regulatory systems have become.
Fintech Feeding Frenzy
In 2015, with more than $12 billion of VC funding stoking the fires, the number of fintech startups swelled to over 8,000, each attacking tiny pieces of formerly protected banking turf. Much like an underwater feeding frenzy with countless piranha-like startups eating every possible ounce of flesh from the banking industry’s bones, we are witnessing an epic transition in the banking finance world.
Many executives inside the large institutions are fully aware of the customer-stealing disruptions happening outside their walls, but internal legacy systems make it impossible for them to shift strategies.
What will the bank of the future look like?
Defining the Bank of the Future
The future of banking will be mobile, happening in devices we carry in our pockets, built into jewelry, and on our wrists, not in fancy office buildings. In less than five years, smartphones, watches, and other devices will replace credit/debit cards, wallets, lenders, stockbrokers and insurance agents.
They will even allow us to transfer money around the world instantly, into different currencies, for virtually no transaction fee. Western Union currently dominates the $583 billion a year "remittances" business and collects transaction fees of 9%. Facebook and others are getting into this market with lucrative business models charging only a fraction of that amount.
Trusted retailers and grocery stores will allow customers to store money in private accounts, circumventing the need for traditional bank accounts. Leveraging data from shopping habits and loyalty cards, approved shoppers will be able to instantly borrow money at the point of sale, select the best payment schedule, and not have to worry about compound interest or hidden fees.
Early adopters will be Millennials and the unbanked poor people of the world. With very little to lose, and unusual incentives to participate, a banking revolution comprised of low-cost tech solutions used by industry outsiders will begin to infect nearly everyone on the planet.
By 2020, peer-to-peer lenders are projected to be handling 30 percent of the established loan business in the U.S. Traditional banks are already devising ways to participate with peer-to-peer lenders to better manage their portfolio.
Since the 2007-2008 recession, banks have done little to regain consumer confidence and trust.
A recent Viacom Media poll of 10,000 Americans found that 4 of the 10 least-loved brands in the U.S. are banks, and a full 71% said they would rather go to the dentist than listen to what a banker has to says.
Banks that survive the coming decades will look far more like tech companies than traditional banks. With global systems beginning to co-opt national systems, fintech startups reaching unicorn status ($1B+ valuations) in record time, and global currencies gaining traction in the cryptocurrency space, banks are in for some turbulent years ahead.
Since money is at the heart of nearly everything, it’s hard not to have a dog in this fight.
That said, I’d love to hear your thoughts. Is the banking industry doomed as many are predicting, or will it reinvent itself and retain control as we enter this new era?