Banking as Plumbing: Dumb Pipes or Smart Infrastructure - Part 1/2

There has been long-standing paranoia in telecom circles of mobile operators becoming ‘dumb pipes’. Most mobile network operators (MNOs) around the world have been trying to fight the over-the-top forces that threaten to erode their margins, and make them mere carriers of information. Their contention is that their massive investments in spectrum and other operational infrastructure cannot be offered simply as bandwidth for companies like Apple, Google and Facebook to innovate and monetize on with direct end-consumer relationships, effectively bypassing the mobile operator in the process.

We are not opining on the futility or benefit of fighting or ignoring this paranoia in the mobile operators’ world. However, there are strong parallels in the banking world that are worth highlighting. Just like mobile networks move data, banking networks move money. They also store money on behalf of their customers. MNOs can move data because they own spectrum, which is a scarce commodity, and possible to obtain only from governments at high costs. Banks can hold and move money because they have banking licenses, that are hard to get and maintain, and therefore provide the banks a strategic advantage in any proposition that involves money. In fact, the regulatory oversight, especially in recent years, has proven to be an effective barrier to entry for disruptors, thus necessitating any new money-related proposition to need a bank that can support it.

However, this is where the difference is critical. While players like Apple and Google have been able to bypass the MNOs using the strength of their consumer appeal, those same players are not able to bypass the banks unless they become banks themselves. This has been tried before by large retailers such as Walmart, only to be shut down by regulators. The result? We now have: an almost Walmart Bank, powered by GoBank; the un-carrier T-Mobile’s Mobile Money for the Unbanked, powered by Bancorp; NBA Bank powered by BBVA, and many more. If these companies could do it themselves, they would. And it’s not because banking is so much harder than running a mobile network or a retail operation; it’s challenging because of the regulatory burden that the banks have perfected the art of managing, and can therefore leverage that skill-set for monetary benefit.

So, what’s the problem? The major drawback of all these attempts is that these are all the same staple wine (usually prepaid cards) in better bottles (non-bank brands). They don’t move the needle much. Still the same language in the Ts & Cs, similar fee structures, the same underlying technologies, and little ability to create new experiences. Moving money between different underlying banks still takes a few days, you still need social security numbers and driving licenses to open accounts, the business models continue to be opaque, and there cannot be truly seamless customer service when something goes wrong.

If banks were truly paranoid of becoming dumb pipes, well…these examples above will ensure that they succeed in making the paranoia come true! In fact, companies like PayPal have successfully demonstrated how banks can be used as plumbing while directly managing the end-consumer relationships - and this was not even limited to prepaid cards. Google Wallet tried and has not succeeded (at least yet!). It remains to be seen how far Apple Pay will go in dis-intermediating the banks whose cards will be used for payment.

At least thrice a week, I will get a call from a new startup looking for a bin sponsor bank. Most of these are onto something cool, but almost all of those who finally do something with their idea will settle for a bank who is happy to be a dumb pipe. Now there’s thing wrong with that prepaid-centric view of financial services innovation, but we can do much better.

In Part 2 of this series, we will look at how banking can become the smart infrastructure of new financial services propositions.