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There's no question the financial services industry has been making some serious headlines as of late. However, I've been more interested in those financial stories that are happening "below the fold" – a new breed of financial services companies working hard to dis-intermediate the industry's old guard and bring financial innovation to consumers. This is not a passing fad; this is a very real movement that has caught the attention of an entire industry.
I saw this first hand at last month's Sibos Conference, heard these sentiments echoed in Dan Rowinski's recent article on mobile payments trends, and am continually reminded of its increased growth with announcements like Square's updated card case digital wallet app.
Sound familiar? Taking some time to reflect, I'm struck by the similarities between the current state of the financial services industry and that of the telco industry some five years ago.
The financial services industry is facing new payment schemes seeking to enable peer-to-peer money transfers and dis-intermediate the banks. Money is no longer seen as the sole representation of value. New alternative currencies are being created and new payment models are being proposed at the infrastructure level of the Internet. Third parties are making moves to go over the heads of today's financial institutions. Rightly so, institutions are looking to redefine the role of banks in the rapidly evolving ecosystem of new competitors.
Let's back up 5-years – telco operators were faced with the similar choice of opening up their infrastructure to third parties or locking them out in an attempt to control the entire ecosystem. As we know, they opted for the latter approach and ultimately paid the price for this decision. Operators closed down the networks, tried to own everything and operate a "vending machine model" forcing everyone to come to them. However, the third parties innovated too fast, went "over-the-top" of the network and dis-intermediated telco operators. Telcos are now left to play catch-up, looking for new ways to monetize the network assets they so tightly clung to before and draw in those they initially locked out.
The key to this (in my opinion) lies in the value of their infrastructure. Much like telcos, financial services institutions have two main businesses – the customer facing component and their infrastructure. They pay for each transaction that crosses their infrastructure – much like a bit crossing over an operator's network. How they choose to approach their infrastructure business is their choice – they can attempt to stop others from playing, or do what institutions like CitiCorp are attempting to do by working closely with third parties to create new revenue streams and more services for other customers.
The Sibos Conference was encouraging, as it seems those in financial services may have learned from telco's missteps. Efforts by organizations like SWIFT and the previously mentioned CitiCorp are signaling a shift in mindset – a re-definition of what a bank really is at its core; an infrastructure play. I think Craig Burton (of Novell and Burtonian fame) said it most clearly, "if you don't bake your API into your core competency, you're not even in the economic game." Also at the conference, CitiCorp announced plans to put their API in the cloud and open up their core network. Essentially, CitiCorp is positioning themselves to become the Amazon EC2 for those looking to use cloud services. If they're able to embrace an open approach and provide the most secure, reliable model for initiatives like virtual banking or Google Wallet (for example) they can find themselves thriving where the telcos faltered.
Craig Burton again echoed this sentiment during one particular Sibos panel when he said, "It's not how I block everyone, but how I bake an API into my core competency to bring people into it." Locking down your assets and attempting to control the entire ecosystem won't work. If a consumer wants a specific service, they will find it (the Internet will make certain of that). It's more advantageous that they find ways to work together to develop more innovative services, faster.
For better or worse, I enjoy the luxury of hindsight from my years in the telco world, which allows me to recognize the challenges and critical choices facing financial services institutions. Will they make the right choices? Will they leverage their infrastructure as their most valuable asset – one capable of not only transforming their own business but the industry landscape at large? I, for one, am eager to see. What do you think? How do you see this playing out? Sound off in the usual place!