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Banks and fintechs what HKMA is getting wrong

September 29, 2017

One of the nice things about the speech is that the head of the HKMA is being extremely defensive which means that someone is screaming at him.  The point that he is making is that banks and fintechs are complementary.  They could be made complemetary, but right now banks are looking at being totally disrupted by fintechs.  Here is the key paragraph where he gets everything wrong.

The paradigm of these newly emerged platforms is that it is highly “customer-centric”, meaning they design everything to provide what the customers want, taking care of many practical and life-style needs of customers. However, when it comes to finance, tech companies need to realise and accept that they have to earn the trust and confidence of customers if they wish to handle their savings and investments. On the other hand, banks need to appreciate and accept that they must revamp the way they offer financial services to their customers.

The problem here is that *no one trusts banks, they trust governments*.  I put my money into a nice safe bank account, because I know that if the bank does something really stupid with my money, that they’ll get a bailout from the government.  Now governments hate the fact that they are forced to bailout the banks, and people hate the fact that their government is forced to bailout the banks, which is why banks have such a big image problem.

1. People don’t trust banks.  People hate banks and trust tech companies a lot more than banks.  People trust governments. Let me ask you a question.  Suppose we live in a world in which there are no government bailouts or oversight.  Suppose the company that holds your money gets hacked or collapses because of mismanagement.  Let’s also assume that there is no government oversight, and if the management wants to spend your money on cocaine and prostitutes, they can.  Who would you put money with?  Microsoft, Google, or Alibaba on one hand or HSBC, Goldman-Sachs, or JPMorgan on the other.

Let’s ask another question.  Suppose you give your money to someone, and they can do *anything* they want with it (including buying expensive cars and houses, and doing things with cocaine and prostitutes).  Under those conditions, who do you give your money to?  A Silicon Valley geek or a Wall Street investment banker.

This poses a lot of regulatory challenges.  Because people trust governments and not banks, if you can create regulatory standards by which tech companies can compete against banks, you kill the only reason that people put money into a bank.  At that point you might try to have the banks use their political connections to keep their monopolies.  They’d love to do that, but they can’t anymore.

2. It’s insane to talk about customer experience when you treat your customers like potential terrorist or drug pushers.  Banks don’t get it.  It’s not about a better user interface or better mobile apps. I don’t care about mobile.  I care about the fact that the bank thinks I’m a drug pusher, and that they are closing the accounts of anyone that is doing anything remotely associated with bitcoin.

Banks seem to think that the only reason that they can’t engage with young people is because they need to get more hip and working with social media.  But they are missing the big picture.  Young people today face the absolute worst economy since the great depression, and it’s because the big banks screwed up the world financial system.  People all around the world are desperate for jobs, and banks can’t seem to come up with financial solutions that take into account how terrible the situation is.  What banks *should* do is to take a lot of the money that they have and invest it in companies that create jobs and stable lives for young people, but the concept of lending out money to small companies seems to be beyond the ability of most banks.

The basic problem is that the business model of commercial banks just doesn’t work.  The standard model is to get a young person in debt with credit cards and mortgages.  The problem with this model is that it assumes that the young person somehow can get a stable job which they can use to pay for the debt, and they can’t.

3.  The freaking business model does not work.  You are a bank before 2008.  How do you make money?  Well you get people to put money into the bank at zero percent, and you lend it out at six percent.  OK.  Except that real interest rates are now zero, and you can’t make money from interest spread.  So what’s your business model?  This is the funny thing.  If you put Microsoft down, and ask them what they do, it’s to make software.  Now ask a bank, “what’s your business?”  Loaning out money?  Cash management?  Maybe, but how then does your business structure support your business process.

You ask why the banks have so much problem with technology.  It’s because it turns out that technology is really, really expensive.  You have to put massive amounts of money into stuff that doesn’t pay back immediate money.  If you are in a situation where your margins are getting squeezed, you just don’t have the money to but into tech, and your technical infrastructure gets worse and worse.  Now in order to stay in business, the banks need new sources of money (ironic isn’t it) so that they can build out their tech systems.  Those sources of money are available, but then you wonder what the banks provide.

4.  The rats are jumping ship if they aren’t getting pushed.  You look at the lawyers and the big accounting firms.  They are jumping into the arms of ICO’s and cryptocurrencies, because that’s were the money is.  Also people sort of assume that the people working in fintechs are socially-maladjusted computer geeks that don’t have the deep financial knowledge of processes in the banks.

If you look at a lot of people working in fintechs, you’ll find a lot of people that were fired by the traditional banks, and more often than not, you’ll find that they were fired for being a bit too outspoken and impatient.  There is a nice quote from Lyndon Johnson, saying I’d rather have people in the tent urinating out then people outside the tent urinating in.  Well, by pushing out the most visionary and imaginative people out of the bank, you now have a big problem.

Let me give you a really simple example of the type of stuff that makes me go crazy.  Where’s my office?  It turns out that I have a home base at home, but I spend most of my time in the coffee houses of Central.  I have my laptop and my mobile phone, and I spend practically all of my time going from meeting to meeting.  So just imagine me working in the bank, and telling my boss, you know, maybe we can provide a better customer experience if we go to their office rather than making them come to ours.  Also, maybe if we go to people’s offices, we can understand what their real needs are.  So will you let me work from a coffee house?  Yeah right……

What are the chances that I could write this blog if I was working for a major bank…..

4.  Rent seeking models don’t work.  So here is the way that big companies used to be able to keep their stuff.  You make friends with rich and powerful people and then have them pass laws that give you a legal monopoly on things.  Sorry that’s not going to work.  The problem that the banks have is that the rich and powerful people in the world are as fed up with the banks as everyone else is.

Also the other thing is that the banks aren’t that rich.  Banks look like they have a lot of money, but in fact they are using other people’s money.  Once it turns out that you can push the banks out and go directly to the money, they have a problem.  The thing about ICO’s is that you have eye-popping amount of money that are moving outside of the banking system.  Now in the old world, the banks could pay off politicians, lawyers, accountants, and other service providers to keep their monopoly.  But in the new world it turns out that the people running the ICO’s have enough money to pay off politicians, lawyers, accountants, and other service providers.

So banks have a *huge* political problem.  Their business model doesn’t work.  No one trusts them.  People are putting their money in other things.  They no longer have the money and and political power to keep their monopolies, and all of the sharks are smelling blood in the water, and the rats are deserting the ship because it pays better.

But I like a challenge.  I’m a fan of alternative history, and I can imagine an alternative reality, where I’m a junior managing director at a major investment bank, and I’m sitting in some office in Central brainstorming with my colleagues, and as we go through the situation we figure out that there is this one key strategy or this really big idea that will kill all of the fintechs, and at that point I start sending out memos, and organizing meetings for the “BIG IDEA”.  And that big idea is ……

Oh wait….  I just realized.  I’m not inside the tent urinating out.  I’m in the outside of the tent urinating in….

Oh well….  Good luck!!!!!


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