31 OctThe Bankers’ Plumber on FinTech: “Banking is essential. Banks are not.”

So said Big Gates, as long ago as 1994. With all things digital, do we even need banks? This week’s post is inspired by a couple of articles circulating on the web today and have me thinking about what banks should and should not be doing.

Bobsguide: “The future of banking is invisibility

Bloomberg: “Asset Managers Bleed $50 Billion as Industry Crisis Deepens

The first of these, looks at some very thoughtful work from KPMG which suggests that the financial services business will be a three tier construction; platform, product and process. The banks may take part in any of those layers, Banks have just three core functions: they create money through making loans, they give people a safe place to store cash and they facilitate maturity transformation.

In the second article, which has a slightly misleading headline, Bloomberg comments on a massive switch away from active to passive investment. BlackRock, the world’s largest asset manager, was the beneficiary of this change. But and it is a big one, those assets moved to passive investment vehicles.

In last week’s post, I offered the opinion that Swiss banks and, UBS in particular, were well placed to do well in digital banking. BlackRock will do just fine too. Size does indeed matter. I am not clear as to how good they will be with multi-currency offerings; no doubt, those smart folks understand how to pick winners and execute in foreign markets. I would though have some doubts about the  ability of an American firm to support clients whose base currency is not US dollars.

After last week’s post, one comment was that the digital revolution will enable anybody to be asset manager and displace the banks. I have to disagree. The EAM or External Asset Manager model is a trip and tested approach to allowing a third party access to manage the assets of a bank’s clients. UBS for one is being smart and selective about this business; it is restricting access to EAMs via a minimum asset size requirement across their client portfolio of double digit millions.

Lessons Learned: I think this tells us that banks will have to work harder. Consumers are voting with their feet. They will not pay a premium for poor service from their Asset Manager.

In order to justify their existence as a “safe place to store cash”, banks will have to appeal to their clients either by offering their services via their own platform or by seamlessly integrating with others’ platforms. That will be the “revenue side”.

On the cost side, banks will have to be very efficient, that is about process. Customers will be largely indifferent to that part, rather process efficiency will dictate profitability. This is where the incumbent behemoths such as BlackRock and UBS have a huge advantage; properly servicing a wide variety of assets in a wide variety of countries and currencies is not a trivial task. I have learned that lesson; I once lost $2mm of Goldman Sachs’ money in an asset servicing mess.

The other very good news here is that “you can fool some of the people or clients some of the time, but you can’t fool all the people or clients all of the time”. Hurray.

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