Issue 29

Disrupting the banks

Delivered on 23 April 2019 by Justin Pyvis. About a 5 min read.

I trust everyone had a relaxing Easter long weekend. This week's issue will be shorter than usual as I just want to briefly touch on a subject of immense frustration but more importantly, opportunity: banking.

If there's any industry that's ripe for disruption it must be the financial sector. Heavily regulated and dominated by a handful of large, often very old corporations, it can be an absolute chore to perform basic tasks that should be easy, such as transferring money. It's a sector seemingly littered with inefficiencies and annoyances at just about every turn, yet it continues to grow in terms of its share of Gross Domestic Product (GDP, see the Image of the Week at the bottom of this issue).

I was hopeful that Apple's much-hyped credit card would break out of that mould but it took the easy way out, partnering with a bank to create yet another run-of-the-mill credit card. Then there was last week's announcement that T-Mobile, an internet telecom in the US, would be releasing "T-Mobile Money", a no-fee transaction account that represents slightly better valuethan existing offerings for those will low balances (a 4% interest rate on the first $3,000, with 1% on anything above that). But it's still just same old, same old.

The financial sector won't be disrupted by tech companies that think they can beat the banks at their own game by producing an expensive card (Apple) or a fancy mobile app (T-Mobile). To truly shake the incumbents will require technology that can get past the requisite utilification of every player in the sector: a way to verify and guarantee transactions without the need for large, centralised systems of trust (banks) and the regulation that - by design - oppresses innovation.

We may not have invented that technology (yet). But it's looking increasingly likely that we have at least ventured down the right path, and that path is blockchain. The speculative fervor that surrounded everything crypto has passed and as Issue 18/2019pointed out, the wheat is finally being separated from the chaff. Simply existing in the blockchain space is no longer enough; only the best products - in terms of how well they can compete with existing industries (think Uber and taxis) - will grow in terms of market share and potentially, one day, market dominance.

I'm hopeful that at least one of those products will flip the banking industry upside down, eroding the rents they currently enjoy similarly to how Uber decimated the taxi cartel. The consumer surplus in doing so would be enormous.

Artificial intelligence is great, aside from the name

As with any emerging field, there will be winners and losers. IBM has realised that AI isn't well suited to discovering new drugs. Meanwhile, rigid rules-based fields such as accounting and imaging analysis seem like perfect fits, and are attracting investment.

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The US is struggling in China

A number of big companies are finding out the hard way that cracking China is easier said than done. Google, Facebook, and now Amazon are out of China, and Apple is struggling badly. Meanwhile, China's Bytedance is doing well in the US (via its TikTok app), although the company was forced to store all of its data outside of China and state that the Chinese government has no access (I don't buy that for a second).

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How will the internet die? Watch Europe

The European Union (EU) is leading the way in terms of regulating big tech. It's a bad idea, but when has a bad idea ever stopped the EU? We're going to see three versions of the internet emerge: a heavily censored internet (the China model); a heavily regulated, devoid of innovation internet (the European model); and a continuation of the status quo (the United States model).

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How low can Zuckerberg go?

The whole world is now aware that Mark Zuckerberg and morals cannot be uttered with a straight face. There are no depths to which he will not sink to increase his power. If Facebook's shareholders really want to be rid of him, they'd be better off heading for the exits themselves.

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How many subscriptions are too many?

I get subscription fatigue just looking at the number of products that have moved to the monthly subscription model. Music, video, gaming, the list goes on and on and grows every week.

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Other bits of interest

Image of the week

Financial services are now about 8% of the US economy (as of 2010), up from a low of 2% at the end of the Second World War. That's not necessarily a bad thing, but it does mean there is now a huge pie just begging to have its rents captured by new entrants, provided their product is good enough to overcome the mountain of regulatory constraints the sector has built up over decades.

Issue 29: Disrupting the banks was compiled by Justin Pyvis and delivered on 23 April 2019.