The rise of next generation Fin Tech companies will trigger a wholesale restructuring of the banking sector. But banks can survive, maybe even prosper, by proactively focusing on becoming world-class ‘NetCo’s,’ standing behind and supporting thousands of ‘ServCo’ startups fighting for customers’ wallet-share across a wide range of financial transactions.

No doubt last decade’s crisis changed banks dramatically. Retail banking and investment banking separated, or were forcibly separated, to ensure ‘this never happens again.’ Since then, banks have begun to face an even more profound threat; a wave of well funded international tech innovators focused on customer experience that is making traditional banking practices look archaic. Over $10 billion of venture capital has poured into fin-tech startups in recent years; unprecedented nuclear weaponry directed squarely at traditional banks.

The parallels with the changes that have taken place in the telecoms industry are striking. The third great utility, telecoms, yielded to similar pressures, with many telco’s splitting their operations between infrastructure and customer service – the so-called NetCo and ServCo divide.

Our view is that banking could go the same way. A bank focusing on becoming a NetCo behaves fundamentally differently. No longer is customer ownership and control the primary driver. It is simply not possible for banks to innovate as quickly, and with as much marketing ‘flair,’ as tech-based growth companies. And banks simply cannot afford to devote the capital required to out-spend innovators and win with financial brute-force.

Retreating to a NetCo means banks become transaction hubs and processors, providing a mature, and trusted infrastructure that allows all the new fin-tech innovators to scale fast. In turn, the innovators take over much of the ServCo market, engaging with customers, dealing with churn headaches, and trying to leapfrog each others’ innovations.

At the same time, NetCo banks can potentially increase margins through aggressive use of BitCoin/blockchain technology. We can imagine a time in the not too distant future where the blockchain approach effectively and dramatically cuts clearing and settlement costs, enabling banks to capture far more of the margin which they now have to give away to legacy clearers. By retreating to a wholesale NetCo model enhanced where possible by near zero-cost block-chain architectures, banks can become more profitable, and less risky, long-term bets.

Banks that become NetCo’s are the spade sellers arming a thousand gold-digging ServCo’s, which is a great and safe way to generate high, repeatable margins.

The argument banks are being dis-intermediated wholesale is attractive and compelling, but may also end up being wrong. It may well be that being forced to retreat to being NetCo’s in fact plays to banks’ core strengths, and saves them from expensive, bruising, and ultimately unsuccessful attempts to innovate as fast as the startups now coming onto the scene.

Posted by Victor Basta @MaExits

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