Can Technology Serve as a Positive Disruptive Force in Banking?
From its Babylonian roots, two primary forces have shaped banking: regulation and globalization. For millennia, sovereigns have held a tight grip over minting power and have used it as a strategic regulatory tool to establish and maintain power. Today's regulations may be more complex, but they also serve many disparate goals, some of them oddly conflicting. By contrast, globalization has primarily exerted an expansionary influence and helped to level the regulatory pressures over time.
Additionally, technology has served as a disruptive force in many industries throughout history. Communication, entertainment, travel, and retail are but a few industries that have experienced continuous disruptions in their primary business model from the impact of various technologies in the past 50 years.
Yet the banking industry -- especially retail consumer banking -- has not experienced any significant disruption from technology. It can be argued that the last major disruptive force in the banking industry was the ATM, which is roughly 50 years old. The Internet, which in that same period has turned many industries topsy-turvy, has had a minimal impact on retail banking. For example, many banks have not fully embraced mobile banking with robust solutions that meet the lifestyles of their consumers.
Some tend to blame technology. Others blame the industry, and yet a third group lays blame on the consumer's shoulders. These denunciations take the familiar forms of technology being cost-prohibitive, the industry being dominated by technophobes, and consumers being afraid to utilize technology where they keep their money. Upon reflection, however, the tension between regulation -- rooted in a national regulator and its government's domestic interests -- and globalization becomes one of the primary forces inhibiting and confusing the role of technology in banking. Regulation inhibits the adoption and use of technology in its most disruptive form. It forces the inventors, creators, and developers of technology to play within a confined arena, rendering disruption a remote possibility.
Globalization, though an overused term, forces nation-states to relinquish absolute control in favor of economic growth through trade. It has evolved into the gravitational pull that brings countries out of their national banking system's shell. It is worth noting that globalization was accelerated after World War II with the creation of the governing bodies of the Bretton Woods system. The IMF, the World Bank, and the GATT laid the groundwork for the modern cross-border trading system that now includes financial services and banking. The relevant question is how technology can become a positive disruptive force within the constraints of these two powerful forces.
The obvious answer is for banks to develop technology or fund startups that show promise. However, this solution faces a collective action problem. For a technology to be effective, it must be adopted by the industry as a whole, offered as a tool without expectation of windfall profit, and be so transparent and ubiquitous that it can be used in Kalamazoo or Katmandu with no fear of compatibility problems. Therefore, why would any one bank invest the capital needed to develop a technology and not be able to utilize it as a lever for its own competitive advantage? This is one reason banks are unlikely to attempt such a project single-handed as they recover from the recent recession and face higher capital requirements, living wills, increased costs, and risk mitigation regimes. The time and capital might at best create a tool to attract some consumers and at worst create a costly distraction for the bank.
One novel solution is the funding of an R&D body that allows its participants to dream and develop big. The idea might seem outlandish, but there is precedent in other industries. In essence, the banking sector needs an Apollo project, an NIH, or a DARPA: a basic research institution with the goal of creating technologies and solutions for banks and their customers in the 21st century. This institution will also need to be international in scope and funding. Fortunately, the vehicle already exists. The Basel Committee on Banking Supervision, which sets the rules for capital requirements, can also be funded and empowered to develop banking technology.
In the aftermath of the global financial crisis of 2008, there is a push among governments and banks to harmonize the main aspects of global banking regulation. Basel III and its capital requirements are one example. Even the Dodd-Frank Act recognizes its own limitations in extraterritoriality and incorporates the concept of harmonization. Moreover, as banks rise from the ashes of that devastating crisis, consolidation will continue to leave the problem of too big to fail ever present, necessitating more cooperation between banks and regulators in developing countercyclical tools and resolution scenarios. The best news is that technology R&D in the banking sector need not be as costly as the Apollo program (estimated to have cost more than $170 billion when adjusted for inflation).
In an environment where global economic and domestic regulatory forces demand greater cooperation between banks and regulators, why not spend a little money on R&D? I can't think of a better place to conduct banking technology research than a little town in Switzerland named Basel.
Behzad Gohari is a Managing Director at The Althing Group, an advisory firm helping clients navigate the capital markets. Over two decades, and through a dozen startups, he has acted as founder, investor, and strategic advisor, as well as utilizing his ... View Full Bio