Next crisis for banks could come via online innovators

Several books about business have been written over the years with the title Blown to Bits. They have explored a common theme: how the internet threatens many established businesses. One of the best examples was written all of 15 years ago by a couple of very smart guys from the Boston Consulting Group. Today, their thesis is commonplace: "The most stable of industries, the most focused of business models and the strongest of brands can be blown to bits by new information technology".

Many of these futurologists’ predictions came to pass. The list of businesses disrupted or obliterated is a long one.

The music business was one of the first affected: today, turning previous business practices on their head, money is made mostly from touring and live performances rather than sales of records, digital or otherwise.

In publishing, nobody seems to make money from book sales apart from blockbuster authors. Even Amazon, the cause of a lot of disruption, does not make much of a profit. The newspaper business has yet to figure out – but not for the want of trying – how to rebuild a sustainable business model. Travel agents have become an endangered species, apart from those specialising in niche areas. Betting shops still exist – much transformed – but a lot of that business now takes place on the web.

Telephony was another early casualty of the internet. Anyone who spends a lot of money making phone calls simply hasn’t been paying attention. But forecasts of the total destruction of existing telephone firms have proved, so far at least, to be wide of the mark. The firms don’t make much money from old-fashioned phone calls but new sources of revenue, particularly from data, have kept many – not all – from going under. And where businesses have been mortally threatened they have typically been merged into more successful rivals rather than going to the wall.

Profit is casualty

Perhaps the key mistake made by those earlier authors was failing to see the extent to which existing companies would be able to adapt, sometimes by the skin of their teeth, to the new technological threats. The deeper insight appears to have been that it is possible to survive in an industry that experiences rapid technological change but that the real casualty is profit.

Technology has essentially shifted the profitability of the telephone and newspaper industries to Apple and Google. Hardly anyone makes serious money from book sales.

But there is a puzzle: the authors of Blown to Bits clearly expected rapid technological change to cause huge disruption to the global banking industry. They were partly right, in that faster and better computers enabled the banks to do more with fewer people. The technology budget of any bank is often a wonder to behold. But the banks are unique: unlike virtually any other business affected by technological change they have been able to see off the competitive threat. There has been no equivalent of Skype in the banking world – in the 1990s internet banks came and, for the most part, went. The established banks saw them off.

A common characteristic of a business that can be threatened by the internet is the extent to which it acts as a middle man. The more money the broker makes the more likely it is technology exists that can do the job more quickly and more cheaply.

Many activities of banks scream out as opportunities for disrupters. The simplest, plain-vanilla bank simply acts as a middle man between borrowers and savers. And technology that can do that has been around for a while now. Why do banks still exist? Bookshops have almost disappeared from the high street but banks, by and large, have not.

Banks appear to believe that having seen off the competitive threat from technology they can do it again. That belief is likely to be tested – in some countries it already has been. Peer-to-peer-lending, crowd-funding and other innovative approaches are eroding the core advantages of banks (cheap access to deposits and, relatedly, privileged access to customers).

Banks have enjoyed regulatory protection from competition – this could be the biggest threat of all. The lasting legacy of the financial crisis could be an environment where banks simply become the latest victim of technological disruption. Having survived one type of crisis another might be about to unfold.