I believe that the word is ‘disintermediation’.
Alright, it’s not a pretty word. But disintermediation is what internet commerce is all about. That is, getting rid of the middleman. Amazon does it in retail. Zoopla and Rightmove are doing it in estate agency. And, dare I say, blogging and direct email (ahem!) is doing it to publishing.
But nobody has more to fear from disintermediation than the big banks. They are the very epitome of the middleman, sticking their snouts into just about every transaction we make.
And wow… if we could do without them, then I guess most of us would. Just this week RBS was fined (again) for sloppy work on its mortgage advice. Get this, out of 164 mortgage sales the Financial Conduct Authority (FCA) examined, only twice was team RBS up to the job.
In today’s world, who needs a bank anyway? As I’ll show you, just about every part of banking is under attack by disintermediation.
How banks wet their beaks
Last week, I showed you how mobile phone banking could be about to whip away one of the key planks of banking as we know it. Mobile banking could rob the banks of their lucrative debit/credit card payments system. The payments system is the perfect middleman business, in which the bank gets to wet its beak in every transaction.
These kinds of tech companies see this wasteful system, and they see a chance to do it better. They have the technology to shove the banks out of the way.
In case you’re in any doubt big tech is on the up, then consider why it is that the US markets have been cracking new highs for well over a year now. Yet, our Footsie is still struggling to retake its peak of 1999. It is, of course, because the US indices are home to the global tech giants.
Think about the big deals we’ve seen recently. Apple’s takeover of music group Beats, Amazon’s raid on Twitch and Google’s various deals in the artificial intelligence sector.
These guys don’t need the banking suits to tie up these deals. Exactly what can a City suit bring to the party? How would the banks even begin to assess the value of something like Twitch, a website where users upload videos of punters playing video games?
Having worked in the finance industry, I can tell you that revenue from mergers and acquisitions is serious bucks for the City bigwigs. But increasingly the banks are closed out of the deals. The big tech companies have plenty of cash, or they have access to it – they don’t need the banks anymore. And they certainly don’t need their advice.
You would have thought that this was enough to turn negative on the banks. But there’s more.
Here come the burrito bonds
I’m sure you’ve heard of crowd funding. Earlier this week, Mexican restaurant group, Chilango raised cash from private investors via the website CrowdCube. It’s been touted as the ‘burrito bond’ – and yielding 8%, I can see its attractions.
Tight regulations have made it tough for companies to raise money via the traditional fundraising route. Raising funds via crowdfunding is much less onerous and it cuts out the middleman.
I mean, what’s a bank for anyway? Of course, it used to be where you deposited your hard-earned savings. But with rates so pitifully low, exactly how many savers are doing so now? It seems fewer and fewer.
Instead of idling away in a deposit account, money is more likely to flow into the stock market. And again, the disintermediation game is well advanced here.
Or to take another example, you must have noticed the growth in investing supermarkets and investing platforms. These things aren’t run by the banks. The traditional banks have once again missed a trick by not getting involved.
Transactions moving to mobile devices, cash going straight into the markets via money supermarkets and non-traditional platforms, the massive tech industry dumping the banks, and crowdfunding circumventing the corporate financiers.
If you thought that bank closures on the high street are purely a cost cutting exercise, then think again. These closures signal a whole industry in decline.
Times are tough for the banks. And thank God, they’re going to get tougher. Yes, the banks have had a pretty decent run over the last few years. After all, low rates and loose money was specifically designed to get them back on their feet.
But moving forward, money flows are carving out new channels, channels that specifically avoid the traditional and expensive banking system.
Of course, disintermediation will take time. It’s not as if the industry will disappear tomorrow. But I would rather be a seller than a buyer of banking stocks right now. Technology stocks look like a far safer bet to me.