Is Banking Impervious to Disruption?

I’ve been in banking for nearly 25 years and I can’t recall a time where banks didn’t think they were about to be disrupted.

In the 1990’s the apparent threat was from the Telco industry. At the turn of the century, bankers were worried about the emerging Tech companies like Apple and Data companies like Google. They were followed by supply chain companies like Amazon and Alibaba, then social sites like WhatsApp, WeChat and Grab.

From time to time, there have been unicorns, like Ant Financial in China or the buy-now-pay-later companies like AfterPay.

And once in a while, companies from other industries have dabbled in the fringes of financial services, ApplePay is one example.

But none have gone all in. Not yet, anyway.

Which begs the question: "Is Banking Impervious to Disruption?"

A quick look at the Top 100 Banks in the world reveals that not one has emerged from the Fintech boom. Every single one of the top 100 has been around for a very long time.

And if we look at Australia and the size of the Big 4 relative to the rest of the banking industry, the market dominance of the big 4 banks has hardly budged … if anything their significance has increased.

That's a lot of money and human capital invested, both in Australia and around the world, for very little return.

Some may say that the Big 4 have deep pockets that they have used to keep pace with innovation, that they are at the forefront of the technology.

But there is so much legacy technology and manual work that this simply can’t be right. If anything the Fintechs should have an advantage.

It would be valid to suggest that the brands of the larger banks are too well known, their marketing pockets too deep, and their customers too apathetic - or risk averse - to change banks.

There is also some truth to the observation that Regulation is a significant barrier to entry, that the costs of compliance are prohibitive and banking licenses are hard to come by.

The licenses aspect is worth exploring further. Since 2018, the Australian Regulator, APRA has granted 10 full ADI licenses. 4 licenses went to fintechs.

3 of the 4 were bold in their strategy. They tried to take the Big 4 banks head on in in markets that the big banks couldn’t afford to let go … namely deposits and home lending. It didn’t work.

86 400 was acquired by National Australia Bank in early 2021.

Xinja collapsed soon thereafter.

And Volt announced in June 2022 that it would return deposits to customers and close its doors.

But one took a different path that looks likely to pay off.

Judo Bank decided to focus exclusively on the needs of the SME segment, a market that traditionally has been difficult, and expensive, to serve. With clarity of purpose and a value proposition that appeals to time poor small business owners, they are getting a toe hold in the market. And they have an A$2.5bn valuation to show for it.

But while their progress is impressive, the Judo leadership team would agree they still have a long way to go before they can claim to have disrupted the market.

So what’s going on?

About 10 years ago I was fortunate to meet Clayton Christensen, the Harvard Professor and author of “The Innovator’s Dilemma”. I was at a work conference in Chicago where Clay was talking through some of the key principles of his book. I’m sure many of you would be familiar with his work.

He made a really interesting point that has stuck with me all these years later.

All of the largest, most admired companies in the world succeeded by disrupting the business models of the incumbents. But they didn’t take them head on. More often than not, they succeeded by attacking the high volume, low margin end of the food chain and gradually working their way up to the top.

His examples included the steel industry, where mini-mills set about winning the ‘re-bar’ market before gradually working their way up sheet metal. And the car industry, where Toyota succeeded in the US market by focusing on the small, compact car market while Ford and General Motors concentrated on producing higher margin SUV’s and pick up trucks.

Clayton Christensen is sadly no longer with us … he passed away in early 2020.

If he were alive today, no doubt he would have been impressed by the Judo story.

But if asked to apply his theory to the Banking Industry, I suspect he would more likely point to companies like PayPal, Block and Stripe since they have all started by focusing on the high volume, low value world of payments and all of whom are working their way up the food chain towards higher margin services like supply chain finance.

Like Judo, they too have a long way to go. And I dare say they have other, more attractive markets to focus on before they turn attention to Australia.

Maybe the Big 4 can afford to rest on their laurels for a while yet.

What do you think?