Disrupting the banking system

By Felix Salmon
March 16, 2011
panel yesterday on whether and how internet startups are disrupting the banking system.

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I enjoyed moderating my SXSW panel yesterday on whether and how Internet startups are disrupting the banking system. There was a good range of small, tech-savvy panelists, and they’re attacking the financial giants in very different ways.

Sean Harper from Fee Fighters has a website designed to make it much easier for merchants to get the best deal from their payments processor — his company doesn’t take any risks itself, and is essentially a merchant-friendly broker in an area which has historically been plagued with opacity. Noah Breslow from On Deck Capital takes credit risk: it’s an online small-business lender, which now has about $100 million in loans outstanding, and which has automated everything from origination and underwriting through to loan servicing. Shamir Karkal from Bank Simple is starting up a whole new retail-focused bank, which I’ve written a lot about in the past — but he doesn’t have his own banking license, instead choosing to use an already-existing bank to speed up the time to launch. Finally Suresh Ramamurthi actually went and bought a tiny bank in Kansas and is looking to discover from the inside how the deep plumbing of the banking system works in practice and how it can be improved. It’s a very long-term project, but it could be by far the most important of the four.

All four of these companies are doing very interesting things, and I’m sure the first three will take some small amount of market share from the big banks by offering friendlier, cheaper, and more efficient services. But my main question for the panel was whether they would actually change the financial system at all, or whether they will always be operating at the margins while the huge players continue to do what they’ve always done, and innovate on their own terms at at their own speed.

Certainly big banks and other financial players innovate slowly. They’re huge, and huge companies can’t be nimble. And they’re also hobbled by trying to combine lots of incompatible legacy systems from all the various smaller banks that they’ve bought over the years. But at the same time, the startups are never going to scale up to megabank size, no matter how attractive their value proposition is. They’ll do clever things with early adopters, and then eventually the big banks will follow suit, or else simply buy them. Huge banks don’t put much store in first-mover advantage: they’re happy letting startups do innovation and then copying what works. It’s certainly a lot easier than putting enormous amounts of money and effort into products like Virtual Wallet which have difficulty getting traction.

Banks also have to deal with vastly more regulatory oversight than startups. To a large degree startups perform the important role of being able to innovate in a largely unregulated environment, and create products which can then be tailored to meet regulators’ requirements. In that sense, it’s good news that the startups aren’t truly disruptive in the sense of replacing the old business models, because otherwise we’d be looking at something which was fundamentally a regulatory arbitrage and which would move even more of the banking system into the regulatory shadows.

And then, this morning, as SXSW Interactive was coming to an end, Visa made what could well turn out to be a truly game-changing announcement: it has built a system allowing individuals to transfer money directly to anybody with a Visa credit or debit card. You don’t even need their card number — an email address or phone number will suffice.

As far as I can tell, this service will only be available, in the first instance, to customers of banks who have signed up for it: you can’t just sign up for it yourself, on your own. But I can easily see it becoming the largest person-to-person payments system in the country. Does anyone have numbers on how many Americans have Visa cards of some description, versus how many have, say, a PayPal account? Systems like this don’t need to be first, or best. They just need to be big, and Visa’s great at being big.


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How much will Visa charge for this? That would seem a key question.

Posted by 3oosion | Report as abusive

Is a video of your panel going to be available sometime in the future?

best, @Chris_Gaun

Posted by Chris_Gaun | Report as abusive

Have you given any thought to the proposition that what you’re doing in moderating such panels and writing about them is that you’re promoting someone’s commercial business prospects? I’ve chaired tech conferences and moderated panels at them, and I always have a bit of discomfort when I discover that I’ve provided a platform for promoting a commercial venture. Usually that’s not what paying attendees are looking for, and from a content standpoint, they’re the ones that count.

I hate being a shill, even inadvertantly. What you are doing would bother me. Clearly you’re okay with it, so I’m interested in your rationale.

Posted by Curmudgeon | Report as abusive

Fantastic Post Felix,

About 2 years ago we started offering a person to person payment system that is very popular but shockingly old school. You fill out the information in a secure online form, click send, and a physical check is sent to that person. It costs 50cents per usage and it uses snail mail so compared to the kind of electronic p2p your talking about it was totally obsolete the day it was born. Still though the usage has been growing geometricly within our customer base which if nothing else illistrates the demand for p2p services.

In Visa’s announcement they specifically mentioned Fiserv could support the new service. There might be 7,000 banks in the country but 6950 of them outsource some aspect of electronic transaction processing to a handful of providers like Fiserv.

Marketing departments at spunky small banks or new non-bank startups can dream anything up… but for a bank to actually develop the product it’s got to jive with their core system. For all but the largest banks the core system is 3rd party.

The big implication I see is for Western Union… If Visa can really make this work that’s a big ding to their near monopoly market position. On western unions website it will cost me:
$12 to send $100 to someone else within the United States “within minutes.”
$8 to send it overnight to an agent location next day.
$8 to send it to someones bank account in 3 business days.

I’ll agree with your premis that’s those rates for that service seems a bit third worldish…

Posted by y2kurtus | Report as abusive

@Curmudgeon, good question. In general, I’m OK with helping to promote commercial ventures I think are good. I’ve written lots of nice things about BankSimple, Lending Club, American Homeowner Preservation, etc etc, for instance. The startups on the panel are all pretty admirable; it’s my job to have opinions, and my opinions on these companies are favorable.

On the other hand, I’ve definitely also been on panels with companies I approve of much less. And there I try my hardest to explain why I have problems with them.

Posted by FelixSalmon | Report as abusive

Felix, thanks for the response. In some industries, it is possible to find speakers/panelists who don’t consider themselves an extension of their corporate marketing department, but in tech the most interesting ideas seem to be tied to a business opportunity. I’ve never really found a good way around it, and on occasion in the past I’ve had to battle the conference hierarchy to hear these ideas (or not to hear them, if they were a sponsor). It has always left a bad taste in my mouth.

Posted by Curmudgeon | Report as abusive