Transformation of the Banking industry is underway

“Banking is a consumer-to-consumer business.  Consumers supply the cash for other consumers as loans through the bank.  It’s the perfect fit for the peer-to-peer model.”

After the telco, media, retail and travel sector, financial trade is in the early stage of transformation in the internet economy.  To be sure, the full impact of the transformation is yet to be felt even with the first to be touched - the telecommunications industry.

Friction

The perpetrator this time is the peer-to-peer business model.  The basis is friction in the industry.  The enabler is the internet.  By friction, I mean the viscosity of issues – low returns faced by consumers (conversely high margins for banks), poor customer service and somehow the feeling that we are lucky they are there to serve us.  As they say, any regulated industry results in lofty margins from lack of serious competition.  The financial industry is also famously opaque, profiting massively from it. 

What’s also driving this transformation is consumers becoming more ‘self-directed’ and getting comfortable online (use).  Pampered from the ease of online services, they demand it while banks remain in second gear.  It doesn’t help that bankers have blinkers on.  They look at IT mostly as a back-office tool to improve operations, not at the front for business development which internet tech now offers.  If they and the regulators are reluctant to change the status quo, the invisible hand will, now that internet mechanisation allows it.  The high margin is the motivator.

Enter the technopreneurs

The p2p model allows more direct transactions between entities when once a trade goes through layers of middlemen.  In digital form (online marketplace), there is only one, reducing costs.  Then because of the reach of the internet market, the business culture becomes highly customer sensitive with ‘competitors only a click away’ resulting in much improved service.  Trust is built upon peer reviews and feedback.  After the 2008 financial crisis, many do not unquestionably trust banks anymore anyway.

Aspects of banking, insurance, financial services and venture capital have been parlayed. Similarly for money transfer, loans, credit/debit cards, wealth management, payment system with more to come.

The p2p business model disrupts.  Any sector that acts as a middleman between consumers is fair game, friction the opportunity.

Internet economics egged it (p2p) along

In internet economics, the directness (ease of) that internet connectivity allows is the reason layers of middlemen is obliterated.

Most of all, the internet broadened the democratisation of society (people are now more self-directed), promoted the open culture (customers prefer transparency, something online firms adheres to better than the opaque financial industry) and changed the persona of consumers ‘when once consumer only consumes, they now also produces’. So they use their resources in this case, spare cash (looking for better returns) through online p2p marketplaces to supply the loans.  Trust is crowdsourced.

And so now we have

·         Funding Circle that connects small businesses with investors who fund their loans

·         CurrencyFair for transfer of money allowing participants in countries to exchange currency by agreeing to the rates themselves.  Or WorldRemit, that is tackling the antiquated consumer money wiring/remittance market.

·         Friendsurance that offers household, personal-liability and legal-expenses insurance

·         LendingClub that lends money to help consumers pay off credit-card bills, consolidate debt, etc

·         Africa’s use of mobile banking led by M-Pesa

·         Square’s point-of-sale systems

·         Digital wallets, etc

And there is PayPal for internet payment and Kickstarter that you already know of, the alternative to traditional venture capital where consumers fund start-ups.  Others are trying their hand at online currency, issued by gaming, social media and online firms.  Others are attempting to develop a de facto global digital currency.

Most intriguing of all is Bitcoin.  While most thinks it as a digital currency, I look at it more as the new gold to back up the new digital currencies perhaps.  Bitcoin or its derivative could have an impact on the future global financial system.  But it is still raw, being formed and tellingly it alone among contenders is seeing a global eco-system built around it and has captured global mindshare.

”Bitcoin shares application of internet economic laws as do the disruptors like Areo, Napster, Amazon.  In fact it aligns the most, compared to other online financial instruments.  It is also the most innovative.  This places it far ahead as the potential disruptor and points towards the future of money and of the financial industry.”

Hang on for the ride

If they quote the startup internet-only banks that failed during the dot.com burst, you know it’s on.

Unlike the telco industry which only started to fight back (nullifying Net Neutrality), the financial industry will fight this right from the beginning and hard.  The banking lobby is probably already in play.  But they will fight losing battles, delaying at best as the wave of change is like a noose around the neck, the harder you struggle the tighter it gets.

Comments?

It seems inevitable the near future will see the making of global online banks, nothing like banks today with web overlays but outliers that natively integrates into the internet ecosystem.

If the financial industry thought the sacrifice of their stock trading business at the beginning of the internet revolution at the altar was it, the gods are hungrier than that.  They learned it from Goldman Sachs.

Mentioned:

http://internetbusinessmodelasia.blogspot.com/2013/11/the-peer-to-peer-business-model-part-i.html

http://internetbusinessmodelasia.blogspot.com/2013/11/bitcoin-future-of-money.html

http://internetbusinessmodelasia.blogspot.com/2013/06/net-neutrality-implications-for-digital.html

Facebook buying WhatsApp; a good deal?

There have been many naysayers on this deal. Here’s my quick take, analysed via the ‘rules’ or dna of the internet economy plus some history.

Did they not say that YouTube at USD1.6 billion in 2006 was a crazy buy of Google?  Now YouTube is the second most visited site after Google thus maintaining Google’s prime position in the digital world.  YouTube also generated USD5 billion plus revenue and gross profit at USD1.96 billion for 2013 (Forbes).  But there are less successful ones; Microsoft and Skype, Newscorp and Friendster.  But these are not compatible marriages.  Facebook and WhatsApp are culturally similar.

WhatsApp

1.     Is a leader in its sector

2.     Has a high number of users/active users and growing

3.     Is in a space that is transformational.  Messaging and internet voice (announced) is replacing sms and voice calls on mobile phones.  Datarisation is the cause (see http://internetbusinessmodelasia.blogspot.com/2013/06/reimagining-telco-impact-of-internet_12.html).

4.     Its business model is aligned with the rising internet economy which means the future’s sound.

5.     Is a next-gen factory mining data from messaging and no doubts would be processing them into informational products for sale directly or indirectly.  As a commodity, data has a lot of value in the information age. 

6.     Has a global market presence, not a local one.  While traditional voice/sms is mostly a local business, voice/sms datarised is a global one ie. volume of data is many many folds higher.  Perhaps one reason for the high valuation.

7.     Business model is also aligned with the internet economy drawing value from it.  WhatsApp relies on data as a commodity and on the value-of-free (see http://internetbusinessmodelasia.blogspot.com/2013/06/the-value-of-free-seeming-paradox-but.html).  Interestingly it also uses the peer-to-peer model, the basis of the currently hot sharing economy sector.

8.     Competitively it uses business methods more in tune with an internet economy.  For example it allows you to create/join a community which is sticky and uses social when it looks through your phone book and informs your contacts you have joined.  Contrast this to Skype which is modeled after the way traditional phones work.  Skype was also designed for PCs but voice and messaging is really a mobile phone app.  With a better model for the internet (and smart phones) it is starting to supplant Skype. In my opinion WeChat has an even better model, it uses more of the internet ‘tools’ and uses social in a more compelling way.  But there’s space for a few global messaging providers.

The only question is whether WhatsApp has cemented its place as one of the messaging platforms in the internet economy like Facebook has in social media.  It will be down to execution by management.  WhatsApp has strong competitors and this space will only get more crowded.  And alluding to Friendster, whether Facebook is going to leave WhatsApp enough alone.

But one thing for sure, telco executives will be alerted from their slumber perhaps realising that serious change is coming sooner, not after they retire!  I hope their response is not to block threatening content in line with an open internet. 

NetFlix deal with Comcast; a monumental disaster for the nascent digital economy

Not the right time!

NetFlix announced a ‘paid peering’ deal with Comcast last month.  This which will see Netflix pay Comcast for better access to its customers is seen as a knock-out blow for Net Neutrality.  In peering, large providers normally exchange data among themselves, no fees paid.  It could mean costs going up for consumers.  It will make it harder for the innovative internet start-ups. 

It began with the courts finally (previous attempts by the carriers failed) handling Sprint a victory to strike down Net Neutrality in the US.  Before this ruling, ISPs are obliged to deliver content equally among all content providers.  With this ruling, the broadband providers can speed up delivery of specific content when a content provider pays them extra.  This is what happened with the Netflix-Comcast deal.  Remember, previously this payment cannot even be made because all content providers had to be treated equally by law.  Now, what happens when say a video streaming startup (typically cash-strapped as with most start-ups) can’t afford to pay Comcast extra?  However good their service is, they are handicapped at the starting block because their content is delivered slower than Netflix.  More likely than not, they will fold. One implication is that the ruling favours the largest companies.

There are two issues here, the Netflix-Comcast deal and the ruling against Net Neutrality.

With Net neutrality, all data on the internet are to be treated equally.   Internet service providers cannot discriminate or charge differently by user, content, service or site.   They cannot charge a different rate to carry different content.  They cannot discriminate against certain services or content by prioritizing or impeding access to any particular site or application through blocking or slowing bandwidth.  They cannot advantage a paying content provider to deliver their content faster.  They cannot block content (except banned content) from any content provider.  It is to prevent unfair discrimination by the ISPs.  It is the preservation of an open internet, important for the ecosystem with the argument that this approach is the reason for the free flow of ideas and inventions and by association good for the economy.

The whole issue boils down to FCC’s not treating internet service as a utility like telephone services and therefore not classifying broadband providers as a telecommunications service.  Which of course it is, the ISP is the future telco!!  This lead to the ruling against Net Neutrality quickly followed by the Netflix-Comcast deal. This article “THE WRONG WORDS: HOW THE FCC LOST NET NEUTRALITY AND COULD KILL THE INTERNET” explains it well.  See http://www.theverge.com/2014/1/15/5311948/net-neutrality-and-the-death-of-the-internet. The Federal Communications Commissioner (FCC) is the US telecommunications regulator.

This reminds me of the 2008 financial crash, a failure of regulation.  Businesses will do what it takes to maximise profits and with a regulated industry, it is the government’s job to prevent what eventually could be granting of excessive powers that takes years to unravel.  It is now widely acknowledged that the US government failed to do this with the financial industry leading to 2008.  I hope they realise the gravity of Net Neutrality and do something to correct the recent court ruling.  This and the Netflix-Comcast deal is a massive blow to the emerging digital economy.  It will hamper this still nascent industry.  Regulations should protect these mostly minnows but instead chose to side with the giants.  To me, they endorsed giving more power to the already powerful! 

The problem is that there is currently no true free market in the ISP industry (although it is liberalised), if there was, Net Neutrality wouldn’t be needed.  And revenue of the dominant broadband providers (mostly the incumbent telcos in Asia) continues to rise.  It is not even falling.  They do not need to be further advantaged.  Worst, telcos in the past only played a secondary role in the economy as enabler for communications, but now they have a direct impact on an economy that’s increasingly digital ie. impact is now primary and much greater.  I wonder if the powers that be realise this.  The large carriers ought not to be allowed to strangle it for their own sake.

The rest of the world tends to follow the US’ lead in such matters so it has a global impact.  In Malaysia, Net Neutrality is law but we need to watch the space.  The Netflix-Comcast deal may embolden the telcos to attempt the same.

For the sake of the internet industry, I hope there would be a response.  And just yesterday news broke that the merger of Time Warner Cable with Comcast will go through an antitrust investigation.  A good start but the Net Neutrality ruling needs to be re-instated.