“There’s only two ways I know of to make money– bundling, and unbundling.” Former Netscape CEO Jim Barksdale famously said that on his way out of a meeting during Netscape’s IPO roadshow in 1995. Over the last few decades, large US banks have been making lots and lots of money through consolidation, cross-selling and economies of scale – bundling. However, the banks are under attack from startups looking to unbundle all of that profitable bundling.
In addition to the other macro changes that have supported the startup culture over the last 5-10 years (reduced costs to start a company, release of the iPhone, more VC funding, etc) the financial crisis of 07/08/09 gave rise to two specific changes that planted the seeds for financial services entrepreneurship and resulting unbundling of the consumer banking industry for the coming decades:
- Smart, resourceful, motivated people left the traditional financial services world. Between 2008 and 2012, there were dozens of rounds of layoffs in the financial services world, with many firms cutting tens of thousands of workers. Others voluntarily chose to leave Wall Street during this hectic period. When the dust settled, hundreds of thousands of financial services professionals were displaced. Many of these displaced people intimately knew how the legacy systems worked (or didn’t work) and are now building on the next generation of great financial companies. These are very smart people. Some will build companies that compliment existing infrastructure, others will build companies designed to fundamentally disrupt and replace pieces of the existing system.
- Interest rates have been near 0% for six years (and counting). Six years is an eternity in the startup world. One of the most defensible sources of competitive advantage for banks is the ability to create net interest margin – borrow low, lend high. In this extremely low interest rate environment, however, banks’ rate advantage is compromised. Customers simply don’t expect interest income today, so startups paying out 0% interest aren’t really at a disadvantage. Low rates certainly will not last forever, but for now, the banks are vulnerable.
This slideshare reviews the core lines of business of a consumer bank – banking, lending, and wealth management – and highlight risks and new competitors to those businesses. Big thanks to Tom Loverro who inspired this report with his awesome post on this subject from late last year.