Over the past decade British author and commentator Chris Skinner has become one of the most influential voices in the world on the future of financial services. He has advised the White House, the World Bank and the World Economic Forum, and he was in South Africa this week to talk to fintech entrepreneurs at an event in Cape Town hosted by AlphaCode.
His primary message was that the traditional role that banks were built for is quickly becoming irrelevant.
“Most of the banks have been built for physical distribution of paper in the industrial era,” Skinner said. “Now we are in digital age that deals with the distribution of data. That’s why money is meaningless. It is no longer a physical asset, it is a digital asset.”
In a digital world, he believes that we are seeing a complete reconstruction of the banking system.
“We are living in a massive revolution of humanity, which is a fundamental revolution,” Skinner argued. “It’s not banking as usual just with technology making it faster and cheaper. It’s actually a complete reconstruction of the whole banking system.”
This is because the ways in which humans build relationships, trade and transact in a digital world are fundamentally different.
“We’re in a world that’s changing very quickly from having industrial era companies that make everything and distribute everything, to digital platforms that make nothing and distribute nothing,” said Skinner. “They just connect people – those that have something with others who want it.”
Hence the often repeated argument that Facebook is now the world’s largest media company, yet it creates no content, and Airbnb is the world’s largest hotel company, yet it owns no rooms.
The question for financial services is what this means for the future of banks, particularly when so many fintech companies are developing outstanding niche products that compete with them in various ways.
“I could build a personal financial system today without a bank involved because the capabilities of these fintech companies give me all of the things I need for my asset management, my investments, my trading, without having to have the whole lot delivered by one firm,” said Skinner. “In the open source, open banking world you have thousands of fintech start-ups who each do one thing brilliantly, competing with large banks that do a thousand things averagely.
“There is a trade-off there, and it is not fintech versus banks,” he argued. “It’s how do the two come together? And I see the two coming together through a big change in the business model of banking.”
Banks all effectively have three parts – the back office that develops products and provides the administration services; the middle office that provides the infrastructure to transact, connecting the back and front office; and the front office that interacts with customers.
“Historically, in the industrial era, the big banks controlled the whole of that value chain and tried to do all of it,” Skinner explained. “They each do it quite well in some areas, but are average in others, and in some cases they do it really badly.”
Now there are a multitude of fintech companies across each of those areas, each doing whatever they specialise in extremely well. The role of the bank of the future, Skinner believes, is to bring these together.
“The bank’s job, in my view, is to curate the marketplace of specialists, who do one thing brilliantly well, and bring them to me,” he said. “I don’t have the time to integrate a thousand APIs [application programming interfaces] to build my own bank. I want the bank to bring the best to me and build a bank for me.”
Skinner believes this is going to be one of the biggest challenges for large financial firms, because it requires a complete change in approach.
“My problem with most banks is that when I walk into the boardroom I am greeted by a group of old men,” said Skinner. “It doesn’t have diversity, it doesn’t have youth, it doesn’t have many females, it doesn’t have a lot of vitality.”
The thinking in these banks is therefore not keeping up with the possibilities that the digital age represents. Skinner believes that his will have to change.
“The real problem is legacy leadership, rather than legacy technology,” Skinner argued. “And that needs refreshing.”
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In short, there’s a lot of innovation in the banking sector and banks will need to get involved in some way in order to survive.
Vote 4
Fiat money (Rands, Dollars, Euros) has no intrinsic value, it’s just an I.O.U. backed by a government with a printing press and a large pile of debt. The only reason we perceive money to have value is because we trust that when we take R50 to a shop, that we cane exchange it for R50 worth of goods & services. Trust is the basis of moneys’ value, same with gold and diamonds – they have value because people believe they have value (not because they are useful, and have margins which are competitively protected, resulting in sustainable cash flows …i.e. like traditional assets [shares])
How does the exchange rate work then? Presumably R50 should buy the equivalent USDollar amount of goods & services that can comparably be produced in the US (incorporating US labour and capital costs or import/export costs where inputs are not locally available) – we call this Purchasing power parity (PPP).
But this parity doesn’t happen in practice. Parity doesn’t exist. Exchange rate pricing doesn’t factor in the public debt burden of the country ..instead it rates the trustworthiness of the government instead. And volatility is emphasized by the derivatives market which has a notional exposure several times larger than the value of the underlying assets. Remember how credit rating agencies rated MBS securities as investment grade just before the 2008 Global Financial Crisis..
The whole thing is just sentimental herd mentality. basically a joke. And millennials realise this. The one guardian of Fiat value [trust] is being eroded, so what now?
Hence the proliferation of things like cryptocurrencies. These experiments are FAR from perfect, and lets be honest most of the early cryptocryptocurrencies will fail with huge losses for ‘investors’. but the reality remains: our antiquated financial system is in need of a revamp. and in the minds of millennials: fiat is ripe for disruption.
Banks, in their current form, are just not needed anymore (in practice they will just evolve rapidly into new forms) – they once were needed, now they are simply a hindrance to social progress.
Why are we standing in an hour-long queue at Nedbank paying 3% transaction fees, waiting 4 days to send money overseas? If you’re a retail bank in SA contact me and I’ll happily discuss.
Vote 19
eish.blabla. Only things millennials recognize are the make of cellphone and their ringtones.
Vote 13
Haha Lulu we are full of rubbish at the best of times! but then again every generation (including yours) has its pros and cons – some considerations:
The first 3 paragraphs were referring to problems created by a different group than millenials;) a simple e.g. is that the unsustainable public debt burdens of today (created by prior generations) are the epitome of ‘instant gratification’ ..yet the older generation ironically describe millennial’s as only after ‘instant gratification’ ..not realising that ‘instant gratification’ is not a millenial problem ..its just a human nature problem (to want things now and not be willing to work for them later).
Shockingly, stats show the baby boomers had, on aggregate, a *much easier* time (compared with millennial’s today) to create wealth; more jobs per applicants, easier to finance a house & business, ability to live on a single income, higher salaries relative to inflation and cost of goods, cheaper (inflation-adjusted) education & healthcare expenses etc etc.
tech literacy is lowly becoming ..literacy. hence being glued to your cellphone is not automatically a bad thing – as with any technology; it’s how you use your phone which makes it a good or bad habit. we don’t say cars are bad because you can have a car accident – we say get a licence and follow the rules ..so you can enjoy the benefits of cars (technological progress) and minimise the (inherent) risks (having an accident in this case).
The older generation serve an *incredibly* important pillar of both the economy and social systems. It would be ridiculous for a millenial to overlook this (and I fear some millenials do make this mistake). But it works both ways; to presume millenials don’t (have a valuable contribution), is also very naive; most of the innovations you benefit from come from younger generations. I’m very sure that when I’m older the younger generation will frustrate me in a variety of ways – but I hope I keep my mind open enough to look for collaboration instead of presuming they are incapable.
None of the above is personal – I can see from your post history that you are intelligent and you don’t just disregard millenials for the sake of it. We all know that these categorisations (Gen x, baby boomers, millenials etc etc) are just oversimplified generalisations …there’s good and bad in every generation.
Vote 3
I find your post interesting. You do not address the age-old relationship between the king and the goldsmith though. The basis of the “modern” economy is the fact that credit must be freely availability. The “miracle and wonder” of the fractional reserve banking system, gives a license to banks to create money out of nothing. The banking system is a crucial element in this relationship between entrepreneurs and capital.
Crypto-currencies may be a novelty and offer great advantages but they do not offer the benefits of the fractional-reserve banking system. In short – the relationship between banks and the public is like the man who is financially dependent on his busybody mother in law. He wishes her dead but when she does suffer a heart-attack, he is the first one to resuscitate her.
We all hate the banks, but we love the credit they extend. We all want bankers to go to jail and for banks to fail, as long as our deposits, savings and salaries are safe, and our credit card still works.
Vote 11
I’m not against debt – Productive debt is good (given the implication it can be repaid by the value-addition it created). the problem is that a huge portion of debt is unproductive ..evidenced by the reality that public debt cannot be repaid. This misallocation of future capital is a burden on current economies: we wanted everything now and realised we weren’t ready to work for it later.
P.s. Fractional reserve could easily be incorporated into a crypto-currency – it’s just not optimal (without any incentive to create *productive* debt). Fiat is simply a poor store of value – it served a purpose historically, but that doesn’t mean we cant progress. I agree we need banks, but we also need *much* better versions of them – cryptocurrencies have some answers ..these aren’t yet pretty and palatable but I’m willing to bet once the tulip mania has crashed ..some real systems will arise from the rubble (analogous to amazon.com & apple [which both dropped >-80% during the dotcom crash] rising to be formidable businesses of today).
Vote
worse, you make a payment now and the guy at the other bank receives in after 3days.
Vote
Agree, especially when EFT is done over a weekend…the recipient sees it on the following Tuesday.
Salaams,
Vote 1
“My problem with most banks is that when I walk into the boardroom I am greeted by a group of old men,” said Skinner. “It doesn’t have diversity, it doesn’t have youth, it doesn’t have many females, it doesn’t have a lot of vitality.”
and that applies to many other industries. when the oldmen wake up the pie will be looong gone.
Vote
Choose a bank led by old sterile men in their boardroom, OR a bank which is managed by children. That’s a touch choice. I trust the kids…
Vote 5
It’s difficult to envisage a world without fiat money as I assume it implies the complete free flow of capital, no FX rate, and no central bank controlling the money supply.
That breaks the impossible (or “unholy”) trinity of economics: a country can only control 2 of the 3 levers. With all 3 out of the country’s hands, it has no control over it’s economic growth.
That may sound OK to the anarchists amongst us, and maybe there’s a valid argument in that. But it is also mouthwatering to people like the Guptas. And we know how that ends.
Vote
“Money is meaningless”
I’m definitely going to try that in Tax Court:
“Dear SARS. My client earned R1,5million in taxable income for the Feb 2018 tax year. However my client’s tax-liability is ZERO, as money is meaningless.”
Case won. Court adjourned.
Vote 9
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