A radical logical conclusion

Written by Leda Glyptis
25th May 2023

I had a blissful couple of days in Iceland a couple of weeks back.

If you want to be fully rescuable by the government, then you need to be operating within the parameters of a public service utility

I had an amazing opportunity to talk about my book and my thinking on digital transformation to a group of fantastically engaged folks courtesy of the Reykjavik Fintech Cluster while being OOO from the day job, enjoying beautiful Iceland. I even got to dress like a Valkyrie, and I can’t tell you how good that felt. Like… why have I not done that before?

But that’s a story for another time.

The story for the time being is a conversation I had with the Fintech Cluster participants after my presentation.

You see, my presentation made a case for the fact that:

The economy is digital,
The regulators in the FS space globally are pushing for a consumer-first digital financial services industry, and
Banks the world over are not doing great yet. I gave the industry a B- overall.

Incumbents are held back by extremely complicated legacy tech estates, management habits and complicated analogue economic models that don’t translate well to the digital era.

Neos and challengers are free of those legacy burdens but lack the scale and product depth that allows for the business model to wash its own face. However, while it’s been a while for some, arguably it’s just a matter of a little more time. For some. Because others have burnt themselves with regulatory breaches or capital adequacy challenges. Turns out ‘move fast and break things’ doesn’t wash.

So, the story is unfinished, for sure, and, as such, not yet a proof point of a digital challenger business model working.

And the regionals… they have all the legacy constraints… all the tech spend vs AUM constraints… talent constrains also, perhaps… but relentless focus on what they are for. Their target addressable market is specific and finite so their brand permission is set, the scale of their ambition is known, and that may give them the focus one would need to leapfrog the technical constraints and create a bank with a focused business model and appropriate unit economics.

I am summarising.

There was more to all this. I was speaking for a good 45 minutes so, if you want the detail, ping me and we can chat. The above is a ‘previously on the Leda show’ context-setting thing because I want to share with you where the conversation went next.

Because… as some of the audience members pointed out… if I believe that the regulator has globally forged and occasionally forced a digital landscape on some banks who were very happy with their data lakes and their monolithic tech architecture and no API in sight, no open finance partnership in sight… if I believe that the regulatory driver has set the tone with most banks (and I do, there is nuance here, but largely, I do) and I believe that digital transformation in banking is not held back by tech considerations but people getting in their own way and, largely, folks struggling to reconcile the new ways of making money… the new distribution models… the cost to serve… and the organisational commitments they have already made (read: business model tensions), and I do… then should the regulator push more and resolve some of those business model tensions for the bankers, if they can’t do it themselves?

What a deliciously rebellious thought. The Vikings have left the longboats but they are restless as ever, it seems.

My first reaction, truth be told, was… well… would that not be the end of the free market? But before I even said those words, the second thought came…

Which was… the regulator in the last couple of decades has started putting stronger parameters in place. Not just against predatory pricing but also against opaque pricing through bundling and weird provisos. That’s over. And by forcing competition, the regulator has also driven cost down and given the consumer the upside. And they have added more and more oversight over what customers see and what they pay and what options they have – all the way through to corporate banking. So actually, some of that is happening.

And then the third thought came, which is that the flavour of competition you get in each market has a lot to do with what the regulator has chosen to permit, so to speak. So, we see big corporates dominating the game in some markets, with telcos and e-commerce giants having a distinctive advantage over ‘fintech’, and in other markets doors being deliberately opened for new entrants. Others yet have favoured more big-spoon-little-spoon partnership models. And even though the regulatory ‘choice’ may not have been deliberate, the shape of the provisos regulators have put in place have absolutely forged business model viability in their jurisdictions. So actually, quite a lot of that is happening.

And then the next question came… which suggested that, in this context and with all of the above being true, is the regulator’s ‘insistence’ on putting certain services together the next frontier we need to bash? Sure, if you have deposits it is easier to lend, it stands to reason. But it only stands to reason if you have the scale of old banks. And that is not a given.

Is there a world where the financial services ‘roster’ of stuff. The catalogue of products. The things that are needed and possible as activities in FS… is there a world where the regulator allows those to not ‘live’ together anymore? They’d still be regulated, of course. Just… differently.

And then the fourth thought came, explosive: because of course if that is permitted, in the era of embedded finance, we could see fully regulated financial activity absorbed entirely into the act of living, transacting, doing business, commerce, governing and so on… without a bank in sight. Not one like we understand it now anyway. And I don’t mean it will be absorbed into the fabric of the activity and be less visible but still there… I mean it could be unbundled beyond all recognition and aligned to the thing, vertically. Regulated. Fully. Just differently. And no longer a distinctive horizontal entity.

And then the fifth thought came, which has been niggling at me since the last spate of bank failures but now it’s been given a new context courtesy of this conversation.

And it was this: if you want to be fully rescuable by the government (i.e., by my hard-earned tax dollars, so if you want my money, Mr Bank), then you need to be operating within the parameters of a public service utility. If you don’t want to be a public service utility then, no problem at all, but you are not fully protected either. Them are the rules. Or should be. If you think through them step by step.

I will leave you with this.

To ponder.

Because as a stand-alone thought it feels properly ‘let’s set the world on fire’, but if you walk yourself there through a series of interlocking questions, it is a valid and logical question. And once you have thought it… it is impossible to unthink.

#LedaWrites

Leda Glpytis