Banking has historically been one of the business sectors most resistant to disruption by technology. Since the first mortgage was issued in England in the 11th century, banks have built robust businesses with multiple moats: ubiquitous distribution through branches, unique expertise such as credit underwriting underpinned both by data and judgment, even the special status of being regulated institutions that supply credit, the lifeblood of economic growth, and have sovereign insurance for their liabilities (deposits). Moreover, consumer inertia in financial services is high. Consumers have generally been slow to change financial services providers. Particularly in developed markets, consumers have historically gravitated toward the established and enduring brands in banking and insurance that were seen as bulwarks of stability even in times of turbulence.
The result has been a banking industry with defensible economics and a resilient business model. In recent decades, banks were also helped by the twin tailwinds of deregulation, a period ushered in by the Depository Institutions Deregulation Act of 1980 (DIDRA), and demographics (e.g., the baby boom generation coming of age and entering their peak earning years). In the period between 1984 and 2007, U.S. banks posted average returns on equity (ROE) of 13%. The last period of significant technological disruption, which was driven by the advent of commercial Internet and the dotcom boom, provided further evidence of the resilience of incumbent banks. In the eight-year period between the Netscape IPO and the acquisition of PayPal (one of the winners of this era) by eBay, more than 450 attackers – new digital currencies, wallets, networks, etc. – attempted to challenge incumbents. Fewer than five of these survive as stand-alone entities today. In many ways, PayPal is the exception that proves the rule: it is tough to disrupt banks.
- The FinTech Moment
- FinTech Attackers: Six Markers of Success
- Banks: Six Digital Imperatives