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

In Part 1 (Read here) of this series, we saw how banks provide the necessary but barely sufficient infrastructure for moving money, especially when newer methods and experiences are involved. The prepaid industry has benefitted from this long tail of financial services innovation primarily because there have been no other practical options to tap into the banking infrastructure.

Of course, the prepaid industry cannot be blamed for the lack of other options. The fear of cannibalization, the paranoia of disintermediation, the counterintuitive yet real comfort of regulatory air-cover and the strength of their brands have allowed the banks and major payment networks to perpetuate the all or nothing mindset in consumer-facing propositions: all your financial services or banking needs as a consumer will be provided by your friendly Bank in a completely vertically integrated fashion, regardless of whether the customer wants to consume those services in that fashion. Not that there is a choice for the hapless consumer!

In fact, the consumer has not even been exposed enough to the possibilities of a more open banking architecture. What does open architecture mean anyways in this context? Let’s go back to our mobile ecosystem analogy from the previous article (link to yesterday’s article): Only 10 years ago, Verizon Wireless, Vodafone and almost every major wireless carrier was investing heavily in the total experience: branded handsets, custom GUIs, trademarked colors, controlled music stores, proprietary app stores, and in some cases even home-grown operating systems.

Today, especially in the developed world, it seems weird to think about one-stop-shop wireless service because the consumer expects the various stakeholders to do their individual jobs well: the phone company provides good coverage; the handset maker provides good battery performance and value; the operating system provides ease of use and the app makers provide specific point experiences - everyone sort-of gets along and the consumer usually has a choice in picking the best providers on all of those parameters - of course within the bounds of what Apple or Google let you do!

Should we expect such consumer choice in the banking world? When can we select someone like Bank of America as the underlying national carrier, someone like Yodlee as the enabling operating system and someone like PayPal as the payment app optimized for experience. Too radical? Well, compare it what the mobile ecosystem offers the consumer today! Note that this shift over a decade was not easy for the MNOs - in fact, given a choice, they would want total control just the way the banks enjoy it. But the twin forces of technology-enabled disruption and insatiable consumer expectations forced them to embrace this collaborative view of innovation, and the consumer is the biggest beneficiary.

This is the thinking that will make the plumbing of banking more akin to smart infrastructure rather than dumb pipes. Of course, they can continue to be either paranoid and/or in denial and deprive the consumer of the benefits of mobile technologies, open platforms and cloud infrastructure, but only as much as the regulatory smoke-screen can allow them to hide behind.

The good news is that we are already witnessing the paradigm shift. Mastercard, not just PayPal, is offering up APIs for developers to use in third party apps. Citibank is hosting hackathons in different parts of the world. Wells Fargo is publicly investing in young companies via their new incubator. There are probably more high quality fin tech challenges in New York City and San Francisco every month than there are major league sports events in those cities. There are companies like Standard Treasury and Bancbox who are systematically building just the middleware that intermediates between banking platforms and front-end apps. Banks like Wirecard in Europe are enabling true white-labeled banking.

And those new thrice-a-week cool fin tech propositions coming my way? Well, at least I can now offer them the promise of coming soon from a forward-thinking bank near you…!

We are getting there, slowly but surely.


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