The “veil effect” in financial services

There’s rough waters ahead for the banks

There is a very famous sailboat in England called the Cutty sark. Built in the Victorian era, it was a type of ship known as a ‘tea clipper’, built for speed, and at one time it was the fastest ship of its size afloat, beating the fastest steamship at the time, making Australia- to UK in 67 days.

(Yes, I know there is no tea in Australia, but the Suez Canal meant she only carried tea for a few years and then went to work to bring the wool back up. from below.)

When it was built in 1869, high speed was economically important, and the tea companies exerted considerable pressure for the fastest ships. Note the interesting technological time lapse: the fastest sailboat was well built after the first steamboats have arrived.

The first iron-hulled steamboat, the Aaron Manby, crossed the English Channel in 1822. The first propeller-driven steamboat, the Archimedes, was built in Great Britain in 1839. The SS Great Britain hulled steamboat iron and screw had crossed the Atlantic in 1847. Christopher Freeman and Francisco Louca summarize this crossing well in their book on technological evolution Over time:

It took enough time for the steamship to overcome the competition from the sailing ships, which also began to use iron hulls. The competitive innovations of sailboats are sometimes qualified to this day of “sailboat effect”, to indicate this possibility of technological competition for a threatened industry.

In the long run, sailboats disappeared, except for recreation, and steamboats took over. But when steamboats first appeared, they spurred a final leap of innovation from the sailing world, which was then spurred on by the construction of large ships.

© Hélène Holmes (2021). NFT available here.

Maybe this “haze effect” can be applied to finance. The Bitcoin blockchain is a kind of shared ledger, one of the first steamboats, the equivalent of the Archimedes. It is not the kind of ocean liner that has transported passengers across the Atlantic in unprecedented luxury and it is not the kind of steamboat that has transported most of the world’s cargo to global markets and this is not the kind of dreadnought that Britannia used to dominate the waves. This is the kind of steamboat that shows steamboats work and sets off a chain of innovation that unleashes a final leap of innovation from sailboats and points the direction of a lasting change in the way the world works. .

Let’s imagine for a moment that this tortured analogy between steamships and decentralized finance holds and that the arrival of fintechs and techfins will, like the steamship, trigger a final cycle of innovation in “traditional” banking. On some level, that seems to be what’s happening now. There is no doubt that my banking app is better because of what the “challenger banks” have done although overall the products and services provided are pretty much the same: prepaid cards, checking accounts, mortgages, etc.

Full steam ahead

There are around 300 challenger banks around the world today and although this has tripled since 2017, the numbers seem to show that the numbers are stabilizing. So what comes next? What are these financial steamboats that will replace the sailing ships of the banks?

What if they’re not banks at all?

What if the reason the challenger banks do not ultimately transform the banking sector is because we are coming to the end of the banking era? What if, as I wrote here in Forbes a few months ago, we don’t really need challenger banks because we don’t really need banks?

Large institutions managing the transfers in time, space and scale together and exploiting the informational advantages may have been the way to organize banking activities once, but this is simply no longer true. Banks can get data from all kinds of sources to help them manage lending risk (just look at the business models around Ant Group in China) while conversely, a lot of other businesses might want to provide loans based on the right funding models. And that’s before even considering the potential of digital currency to bypass the banking system altogether, a topic of much discussion around the world right now.

This institutional advantage is threatened. Like Tom Noyes observed, while banks were originally the Big Data business, banks are now at a disadvantage in connecting their data (from a regulatory perspective, even if they have access to crucial non-financial data, due to GDPR , CCPA and OCC, etc.). Banks are constrained where non-financial services players are not: real challengers can use open banking as a means to get the data they need and to bring new products and services to consumers.

I stress that it’s not just technologists who think this way and refer you to the International Monetary Fund (IMF) document on “What is really new in FinTech?”. This highlights the potential for new players to deploy new tools to collect and analyze customer data in order, for example, to determine creditworthiness. They point out that the real challengers exploit this non-financial data and that research shows that data such as the type of browser and hardware used to access the Internet, search history and online purchases are often superior to traditional methods. credit assessment. This is why platforms like Amazon

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, Facebook and Alibaba (the techfins) are integrating more and more financial services into their ecosystems, allowing the rise of what the IMF calls “specialized suppliers” (that is to say not banks) who compete with banks to provide the functions that society needs.

One of the outcomes of the fintech revolution will undoubtedly be to unbundle and unleash value as big tech dreadnoughts overwhelm the majestic galleons of consolidated banking and utilities. It all seems to suggest we’re somewhere around advanced challenger Already and in the years to come, investments will shift from niche banks to more specialized niche financial services players. It’s not a difficult prediction to make from London, given recent capital injections for (for example) Curve, TrueLayer and Checkout.com, among others, leading the way.

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