Are Banks Too Big to Not Fail? Is that Scary or Thrilling?

B2B Payments and Finance

I’m excited to be returning to Money20/20 in Copenhagen this week. I’ll be speaking on Day 2 on Alternative Approaches to Industry Issues in Room 5 at 16:25. I hope you can join me if you are attending.

One of the key themes of this year’s Money20/20 agenda is B2B Payments & Finance –  right in line with our mission here at Veem as we continue to innovate in the B2B payments space helping our small business customers to easily and cost effectively send and receive international business payments. We believe the future of the financial services industry is not scary, but thrilling in that it lies outside the traditional commercial banking industry, and it’s our mission to lead that effort in the payments space. And while Bitcoin currency and blockchain technology are often rightfully cited as the leading cause of financial disruption today, in truth, traditional banks started deconstructing on their own long ago.

Cracks in the megabank foundation

“To compete effectively, banks may need to embrace a new set of strategic priorities, based on the ‘unbundling’ of banking services and processes, and the ‘deconstruction’ of the integrated banking model.” This seemingly contemporary statement was actually made by Feng Li in 2001 in his article, The Internet and the Deconstruction of the Integrated Banking Model.

Li’s article cited the rapid development of information and communication technologies – namely, the internet – as a foundation-cracking force for the banking industry. But not just in the way most industries were leveraging the internet at the time – as a more efficient distribution channel.

Li believed that ‘simply deploying the internet as a more efficient distribution channel (would) not bring sustainable strategic advantages’ for banks.

Fast forward to today and the United States has the most complicated and decentralized banking system in the world, overseen by no less than a dozen federal and 50 separate state regulatory agencies. Which has stymied banking innovation, led to a never-ending ‘pile-on’ bank fee structure, arguably led to the crash of 2008, and produced a whole lot of very dissatisfied customers.

Since the crash, new financial regulations have been put in place making the cost of compliance and other ancillary services like loans, investing and wire transfers more costly for banks. Outsourcing these functions to specialty service providers has become increasingly attractive for banks, increasingly utilized, and increasingly confusing for banking customers. Our already fractured banking system continues to become increasingly fractured.

Just how deep-seeded are megabanks?

The American public has been told that the health of our economy depends on big banks, that they are too big to fail, and that our tax dollars must be used to bail them out if they teeter on the precipice of failure. But is that entirely true?

The megabank, is in fact a relatively new phenomenon. Until the 1980s, all banks were regional – the U.S. didn’t even have interstate banking. Then, in the 1990s, there was a massive merger wave in the American financial industry.  The repeal of the Glass-Steagall Act in 1998, allowing insurers, investment banks, and commercial banks to be owned by a single company, was the final and perhaps most significant catalyst for the birth of the megabank.

But as we’ve seen, the megabank heyday didn’t last long. By 2001, banking strategists were already calling for the unbundling and outsourcing of services.

Move over megabanks – fintech has come to town

In many ways, megabanks in America are already failing – failing their customers most of all. Their strategy for keeping their behemoth institutions afloat has been to pile on the fees and outsource what services they can. Any small business owner who’s applied for a loan at a major bank knows full well that the process includes a confusing array of loan originators, officers, underwriters and servicers, none of whom work for the same company. When errors occur or the process gets stalled, the inevitable finger-pointing battle begins. In a multi-institution process, no one institution is responsible for the entire process – nor wants to be.

The same is true for businesses making B2B payments through traditional banks. Small business wire transfers go through a multi-institution process chain making them difficult to track, more prone to error, and devoid of an ultimately responsible party who can step in if things go wrong.  But if the megabanks in the U.S. were to become so cumbersome and inefficient they began to lose enough customers to fail on their own, what would that look like for the American banking customer?

We need only go back a few decades to see how smaller financial service providers consistently met the needs of ordinary banking customers just fine. Pre-consolidation banks made plenty of small business loans, and sold and serviced investment services, mortgages and car loans. And with today’s advances in technology, smaller institutions can rally the same data management resources and process optimization principles. Just like small businesses today can leverage technology to compete with big businesses in unprecedented ways, so can small banks. And so can innovative fintech companies like Veem.

Technology and the fragmentation of our banking system has also opened the way for emerging fintech startups like Veem to challenge the banking status quo and provide more affordable and satisfactory financial services. I’m looking forward to my trip to Money2020 where I can meet with fellow financial technology innovators and further consider what might be down the road for the American financial industry and the American banking consumer.

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