Will Unbundling and the Erosion of the “Confusopoly” be the End of Banking?

We have known for several months that the risk of harm from COVID is highly correlated with underlying pathologies. Along with diabetes and asthma, I’d add another risk condition to the CDC’s list: being a bank. As with many of those other illnesses, being a bank has been high-risk now for some time, but COVID is accelerating things. The complex, intertwined suite of services that today we call “banking” is being pulled apart, and we are going to be left with an array of separate products that each perform some aspect of banking services.

Prior to the internet revolution, it was difficult to imagine disaggregating the delivery of money services from the possession of capital. Even payments, which sound simple, used to involve the effective extension of credit (which is why check-kiting works — or at least works until you get caught). As recently as the early aughts, the night skies were filled with thousands of small planes flying bags of checks across the country; almost forty billion paper checks flew over the U.S. as recently as 2005.

These days, of course, we just send the bits. Banks can do that, sure, but so can a company like Venmo.

These days, of course, we just send the bits. Banks can do that, sure, but so can a company like Venmo. The possession of capital used to be a decisive advantage, but once we made the shift to treating money as information and not as gold bars or pieces of physical paper, technology replaced capital as a competitive barrier.

Furthermore, initiating or collecting payment used to require physical interaction at a location. Banks invested in grandiose, confidence-inspiring structures in which to welcome their customers. While the practical necessity of branches and elaborate, publicly-accessible headquarters has been questionable now for some time, COVID has turned these locations into liabilities. In-person interaction with banking customers has gone from a technology-induced gradual slide into irrelevance to an outright dangerous proposition practically overnight.

Now that technology has sundered the coupling between capital and services, and COVID has rendered even luxurious buildings terrifying, we can separate modern financial services businesses into two types: those in which capital matters; and those in which technology does. Traditional banks will continue to dominate capital-intensive businesses like lending, while technology companies will dominate literally everything else.

Traditional banks will continue to dominate capital-intensive businesses like lending, while technology companies will dominate literally everything else.

In a modern economy, capital is a commodity. The margins of the banks that provide this commodity will approach their own cost of capital, while technology companies will siphon off the high-margin service businesses with which consumers and businesses interact directly. There will be two somewhat counterintuitive consequences for consumers: first, the cost of their financial services will plummet; and second, they’ll have to pay for everything separately.

Because banks today have captured an enormous variety of services under the umbrella of “banking,” the costs of those services are spread across the entire platform. A kind of “confusopoly” has developed, in which the true costs are hidden from consumers in a thicket of interlocking and opaque offerings, similar to how cable TV and wireless phone bundles hide how much each element of the service actually costs. A bank may offer “free” checking but in fact makes up the cost of that product by selling mortgage services, credit cards, and charging overdraft fees. The consumer is actually paying an exorbitant amount for that free checking account: on average $300 per year in overdraft fees alone, not to mention the capital leakage created by bundled credit cards and mortgages offered at premium rates to captive account holders.

The Great Unbundling will break this confusopoly, but the new transparency will come with price tags on every service. Checking will no longer be ostensibly free (but secretly expensive); it will cost, say, $5 each month. Instead of being subsidized by their own hidden fees, debit cards likely will come with a monthly price tag as well — and on down the line of financial products. Furthermore, because these products will be forced to stand alone, the competitive market will at last do its work, driving down prices, improving quality, and providing consumer choice.

All of what we call “banking” today will become “Venmo-ing” or “Point-ing” or “Dave-ing” over the next decade. While the savings and transparency will be a boon to consumers and the economy more broadly, the atomization of services will require consumers to make even more decisions about how to structure their financial lives. Meanwhile, banks that have failed to deploy innovative technology or partner with technology companies will be left to nurse the dwindling margins of an increasingly commoditized capital market.

The same internet that makes the Great Unbundling possible has also brought us access to information like never before. A myriad of information sources at our fingertips — along with highly personalized finance websites — will increase consumer choice and provide far more transparency to the decisions we all must make. And banks? They’re not going away; they’ll continue to exist as regulated utility-like entities, and those that want to expand their margins will have to innovate or partner like any other business.

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[Photo by Joshua Hoehne on Unsplash]