It happens all the time. Telecom might be the most pertinent example of an industry having its monopolistic structure – and value chain broken up. Telcos’ used to be considered natural monopolies, because of their huge investments in access networks, enabling all customers within a region or country, to get magical services like telephony. Once the service provided was freed from the ties of a specific network, it unbundled and became a higher-level service that competed with other properties, and left the pipes to being just pipes.
It’s not just telecom. As businesses get reconfigured like this, there is always parts that are thought of as high value and the stuff sneered at as low margin, low value businesses. It is almost like a gut reaction. You instinctively lean towards the high value bits, disparaging the other parts not worthy of pursuit.
But then something interesting happened. An analyst-duo, Craig Moffett and Amelia Wong, in 2006, wrote a report called the Dumb Pipe Paradox. They pointed out that cable-TV operators actually – contrary to the current thinking – would be more profitable if they stuck to their knitting, and focused on just being a dump pipe and in the process, open up to other operators accessing and using their network.
The financial premise is that revenues would fall, but so would operating expenses – to an even higher degree, leading to a higher margin. You would also need less capital to run the business so that would increase ROI and ROE.
This then, giving us reason to dispute the more or less instinctive aim for what is deemed higher value business.
In fact Telia AB – previously, state owned Televerket fought a monopolistic battle long and hard to withhold the inevitable competition and opening of their networks. As early as in 1980 there was a parliamentary decision to open the market for terminals attached to the public network. They effectively, both by support of the owner (the state) and by (foul?) business practices, managed to keep new players out of their networks. When Tele2 started to aggressively market ”internet access” it was a huge success, which forced Telia AB to start negotiations with them.
So what is this yearning for “higher-value-business”? Pure vanity? Given that things aren’t necessarily that simple, at least we can, or should have an eye open when such hasty assessments are being thrown around.
What about banks?
As a matter of fact, a similar situation and discussions can be noted as new players are challenging the incumbent banks. How should banks act as EU-regulations are effectively and very legally breaking up the previously intact value chains that banks operated in. In effect, you will have three previously dependent parts broken up. Account and payments infrastructure, client and branch facing products and services, and the customer experience layer.
As predicted, the infrastructure providing the foundation for large-scale banking – i.e. accounts and payments, are metaphorically deemed “dumb pipes” and not considered a profitable position. The new players are all aiming for the customer experience layer, and in some instances creating new services. Left then is the old, tired account infrastructure providing the backbone for all the new cool things coming along.
All incumbent banks are aiming to be in all parts of the business spectrum, defending the universal banking position, basically competing both as infrastructure providers, and with new higher-level services by provided by agile and nimble players.
However, the term du jour is open banking. The phenomenon was actually developed some time ago but has taken on now, as the regulatory reality has become a flare of light in face of already pale bankers. As a large-scale bank, embracing this concept to its full extent is really interesting.
Lets go back to our industry analogy with Telecom. Telcos’ seem to be operating both as open networks (i.e., dump pipes) and ensuing higher level services, such as building out an investment business, buying stakes in startups. Telia, I think, have realised that they do not have, or will have the competence or the ambition to create anything like Spotify. Instead, as we all know, they bought 1,4% of Spotify for 950 MSEK in order to provide a higher-level service to their customers.
The problem is that the customers in neither of these services see the value connection between these to entities. The network and the service are not really complementary products, like hot-dogs and ketchup, where one ingredient enhances the value of the other. Rather the access network has the same relation to Spotify as electricity has to the fridge.
The actual music combined with the ability to play every song ever recorded, anywhere, on any device is certainly complimentary, in the sense that each parts add value to the other. Let’s say that Spotify was dependant on Telia for getting access to music libraries, the same way a banking startup is dependent on accounts filled with information and cash, then there would be a connection to build upon. In fact, Spotify and the actual raw materials provider – the publishing and recording industry has forged a really valuable ownership of the customer facing entity – Spotify.
Contrary to the telco-startup-X constellation – a dumb pipe-bank actually would provide benefit to overlay services, and vice versa. This is how the forward leaning bank should view partnerships. As the possibility to tie the banking version of Spotify (and others – why limit this just one service provider?) to their account structure, and be bound by ownerships and share revenue streams just as a profitable partnership should be. All the while providing the best possible, innovative service to the customer base. This is very likely one of the end game discussion going on between Tink and SEB at the moment. If not – maybe it should be.
The conclusion, if you stretch your imagination a decade into the future, is that banking as we know it will not exist. In fact, I believe that the term banking already now, starting to represent something antiquated. Actually I think the entire category is about to be refreshed as new players change the perception of banking from transactions to money management, spending management, financial collaboration tools, and maximising my personal ROE – i.e., how can I save more based on my behaviour.
Paying bills. That is something done by a bot.