We have new media as a result of the network. The network and web is affecting all aspects of life. It will surely transform credit and banking too. Here is why and here is what might take banking as we know its place - a much older version of credit but now networked. This matches also the new BIG business - many very small networked to be large
The Economy - Banking and the Future - A Flight to Safety - The chickens are coming home to roost for the "full service bank". While the big banks may be too big to fail, the retail depositor is very nervous. Europe is on a knife edge. There is talk at a very high level about "Ring walling" the deposit side of banking. We know how weak the US major banks are too. But I have no optimism that reform will be easy. But I do see the depositor looking for safety already. There is a lot of chatter about "maybe I should look to my credit union?". People are not stupid and know that there is a lot of uncertainty abut the big banks and little room now to support them. This I think is the environment that could offer Credit Unions a huge opportunity.
Absorbing this flow of share will be a challenge though. Can Credit Unions scale without doing what the banks have done? How can they scale and still be rooted in community? How can Trust be maintained? Also how can Credit Unions serve the new market for the very small?
The Complex Nature of the Business World today - Our banks have fully adopted the machine or "Ford" model to cope with the Machine and Ford economy. This worked when we all played by the Ford rules. But here is the problem, Ford Banks" can only deal with the simple because they use machine rules. The Big banks like Big Business. It's easy to follow. They like "simple" like mortgages and credit cards - they are easy to follow.
What they cannot do easily is to get a handle on where most people and business is going today. That is the very small and personal business. This is very complex and being Complex, cannot be evaluated by simple rules
This new economy is based on networks of the very very small. It is emerging quickly and is ignored by banks as they are structured today. These enterprises are very human and so very complex. They don't have traditional assets. They don't operate in a simple linear way. The "rules" don't apply.
These new businesses also sell into a new market. A market that is based on the value of Trust. For a growing number of people no longer trust the offerings of the big. They want services and products that they can trust. Real soap - Real Food - Real anything. These businesses cannot scale traditionally and maintain their key advantage, trust. So they too have to learn how to scale using networks.
For many of us now know that the Big cannot make or offer Real.
Nor will they offer the jobs back. As the big get bigger, they have to shed labour. For in the machine model it is the only way to keep your ROI. You take the real out of your product and you replace your labour with a process of a cheaper source. There is no stopping this process.
This is the future, just as the Ford Model was the future in 1905.
We don't know how to evaluate this kind of tiny networked business by using the machine rules approach. But we did know how to do this in the past when we had local banking.
In 1900 most business was local and operated like this. They did not use the web to network but network they did. They used face to face locally. Banks developed extensive personal relationships not just with each person - as we talked about on the phone - but participated in the health of these local networks as well. Like a good gardener, they helped their local community get stronger
We used to know how to do this. But of course "it" does not scale if we use a machine/industrial model.
To meet the opportunity of the new market, we also have to discover how to scale this older process. How can we do this? We know that all natural systems are fractal. If we can design a tiny model based on network principles, we can have confidence that we can scale it.
The Pay Off - A Virtuous Cycle of Return - There is a systemic reason why Traditional Banks fail - There will be a systemic reason why a network model will prevent this Ford Banks end up taking on too much risk.One of the reasons why Banks take too much risk is that as they grow, the pressure on the ROI grows too. This is not corporate stupidity but an outcome of the design. In the model, the structural expenses grow in lockstep with assets. All resources have to be purchased. So when earnings get squeezed, they have to take more risk to keep up the ROI. By taking on riskier assets, they lower the threshold for default and so increase the future risk of pressure on earnings and capital. It's a vicious circle. For a while, this can be offset by scale. Hence more mergers. But in the end, there is no where to offset the risk and all the costs are locked in. Today all the big banks own too big a chunk of the risk. This is where we are in Europe. There is no where to run anymore.
But in a real network, most of the resources are attracted in for free. Look at Visa or Interac. If we use a real network, we can find ways of scaling that breaks this connection between structural costs and assets. In a real network, the resources and revenues scale exponentially while direct costs scale at a modest linear rate. Nearly all the value in a network is not on any members balance sheet. As the total network value scales, so each member gets more value. We can see this in staffing. Back in 1995 Visa had 3,000 employees and B of A had a 100,000. Visa did a vast multiple of transactions to B of A. B of A now has 300,000 employees and is laying off 30,000 in a vain attempt to get its costs in line with its revenues.
The OpportunityJust as the Ford Model replaced the local artisan model and was adopted by every organization, so the network will do the same in our own time. It's evolution!