Fragmentation and Consolidation in the Banking Industry

I recently read James Haycock’s book about the alleged disintegration of the banking industry.   His vision is that independent currency will replace state currency, peer-to-peer lending will topple the consumer lending industry, and all the services offered by banks as we know them today will be split out among small independent niche companies that provide individual services.   It’s panic-mongering nonsense, of course, largely because the premise ignores the same thing as so many other half-witted technology fanboys: the customer.

Technology only becomes dominant if it is adopted by the customer, and it is only adopted by the customer if it offers value – in terms of more benefits or less effort.   Merely because something is possible does not mean it is valuable, and historically the demise of many firms and entire industries has shown that doing things that are fascinating to technology advocates and industry insiders is not a sure (or even likely) method of developing a sustainable business.

And on the topic of history: the disintegration of banking is not at all a step forward, but a step backward.   Until the last century or so, the bundle of services offered by modern-day banks were completely disintegrated: there was a mint that produced money, a treasury that stored it, banks that stored it, money-lenders that loaned it, capital firms to invest it, and a fleet of specialized companies that handled other matters of exchange.  These services were integrated into the modern-day bank, which offers the customer the convenience (the “less effort” requirement for adoption) of conducting all their money-related business with a single firm rather than several.

To suggest that disintegration of banking is the way of the future simply ignores that it was the way of the past – from which the industry evolved away, and for very good reason.  One might as well predict the death of supermarkets and departments stores, suggesting that customers will purchase each of the hundreds of items they use direct from the manufacturer, in a digital version of a medieval market square.  This is the way of the past, not of the future.

Even in the digital channel, evidence shows integration, rather than disintegration, is happening: amazon.com began as a niche retailer, selling only books, but over time has become an online retail center for a broad variety of consumer goods.  Meanwhile, most firms that attempt to specialize in a single product or product category have largely been failures.  There are very few instances in which a single-product site has been successful or even sustainable.

Granted, there might be cost savings – but the sheer inconvenience would cause the effort required to exceed the value.   While most customers use fewer than ten banking products, there is still some hassle in dealing with multiple providers, and cost savings are generally in favor of a single provider who will offers better rates to customers who purchase multiple products and who subsidizes the cost of unprofitable products with the profits of profitable ones.

With this in mind, I do expect that the disintegration of banking services will affect few people and will likely be short-lived.   Unless a provider offers considerable value that far surpasses the inconvenience, there is simply no reason for the customer to undertake the hassle of dealing with multiple niche providers simply because it is possible for them to do so and technology makes it marginally less inconvenient.