What a New Economics in Banking

The bank recognises that most activities outside direct servicing of the customer is commoditised. A commodity is worth nothing, and so all processing and technology is priced at near zero because they become freely available networked widgets

Commodity processing being made freely available is a radical departure from bank histories which is why this will be a culture shock for many bankers … and yet, the pricing and economics is relatively obvious.

Let’s start with the cost of building BaaS.

The cost can be however much you want it to be. In HSBC’s case, the cost of building their global internet service is around $250 million … but that’s cheap enough considering that they were building a global bespoke service.

For HSBC that means they can launch a completely customised internet banking service in any country, by just ticking the boxes you want in that service and it's up and running. No additional development or cost.

But for most, it's not $250 million developments, it's a few thousand dollars to deploy a piece of functionality.

Y’see the key point is that, whatever the cost is, once it’s built - it’s built.

That’s it.

You have sunk the cost and built the widget.

Now, the critical point is not to protect the widget but to get everyone to use it.

What’s the point of investing in a developments today if you can’t get volume?

And that’s the point of BaaS: once you’ve built your widget, crank up the volume and volume increases fast these days.

That’s how Chi-X, the pan-European equities trading facility, could take more than 10% of many traditional European exchanges equities trading ... within a year.

And, having built the system, it is why Chi-x, Turquoise and NASDAQ OMX and co are after volume.

It is why Zopa, SmartyPig and PayPal are leveraging volume.

And that's what any bank building components of applications should be thinking about today.

Volume.

Because additional volume adds zero cost and purely feeds return on investment.

Think of it like making movies. Once the movie is made, you’ve spent all the budget. Now, the point is to get bums on seats and market the hell out of it.

And that’s how banking widgets in BaaS should be considered.

Market the hell out of your widget, crank up the volume and focus upon the service delivery – the human interfaces – as your critical value-add differentiation. Your value-add is how you package the widgets and present them, not the widgets themselves.

That’s why Citigroup have been marketing the hell out of their FX and other services for the last two years. They want volume on their widget, and Citi are one of the few banks who have been white labelling their systems to other banks. They get some of the BaaS components.

The idea is really illustrated by telecoms folks who get networks. For example, I once worked for NCR when they were owned by AT&T. I always remember the AT&T guys talking about “minutes on the network, it’s all about minutes on the network”, and that’s the key.

Once you’ve built the infrastructure, it’s all about getting volume because it costs you no more to process a billion calls than it does to process one.

Which brings us back to the economics of banking in the future, under the BaaS model and the culture shock this creates.

I was recently with a head of payments at one bank for example, who said: "our technology guys asked me the other day why we charge more for a $50 million payment than we do for a $5 payment, when the infrastructure costs to process are the same? Are they mad?"

No sir. They are asking an obvious question at the heart of the change that needs to be made to banking cultures as they realise the change that technology now delivers.

This payments guy was from that old school of banking that are the ones now waking up to the new world realities.

Thirty years ago, when many senior bankers were starting out in their banks, they were told that technology was expensive, inflexible and must be used forever, or at least until the systems peg it anyway.

That’s why every project was massive, time consuming and demanded huge cost.

When SWIFT, MasterCard, Visa and the key networks for transaction processing were built, for example, they had to be built by an industry consortium. No individual bank could afford such a huge project or cost. That is why these were cooperative groups back in the 1970’s across all banks, even though MasterCard and Visa are now proprietary firms. Nevertheless, the MasterCard and Visa IPO’s are only recent and recognise the economics of BaaS.