Banks, Walled Gardens And Metaphors of Place
It’s interesting to think of banks as walled gardens. For example, on the Network, we might call Facebook, or aspects of Apple or Microsoft, a walled garden. The original America Online was the classic example. While most of us prefer to have walls, of some sort, around our gardens; the term is generally used to criticize a company for denying users open access, a lack of data portability and for censorship (pulling weeds). However when we consider our finances, we prefer there be a secure wall and a strong hand in the cultivation and tending of the garden. Context is everything.
More generally, a walled garden refers to a closed or exclusive set of information services provided for users. This is in contrast to providing consumers open access to the applications and content.
The recent financial crisis has presented what appears to be an opportunity to attack the market share of the big banks. Trust in these institutions is lower than normal and the very thing that made them appealing, their size, is now a questionable asset. The bigness of a bank in some ways describes the size of their private Network. On the consumer side, it’s their physical footprint with branches, or stores as some like to call them, and the extension of that footprint through their proprietary ATM network plus affiliated ATM networks. On the institutional side, there’s a matching infrastructure that represents the arteries, veins and capillaries that circulate money and abstractions of money around the country. Network is the medium of distribution. Once the platform of a big bank’s private network is in place, they endeavor to deliver the widest possible variety of product and services through these pipes. Citibank led the way in the financial supermarket space, now all the major players describe themselves as diversified financial services firms.
Every so often, in the life of the Network, the question of centralized versus distributed financial services comes up. Rather than buying a bundle of services from a single financial services supermarket, we wonder whether it’s possible to assemble best of breed services through a single online front-end. This envisions financial services firms providing complete APIs to aggregators so they can provide more friendly user interfaces and better analytics. Intuit/Mint has been the most successful with this model. It’s interesting to note that since the financial supermarkets are generally built through acquisition, under the covers, their infrastructures and systems of record are completely incompatible. So while the sales materials tout synergy, the funds to actually integrate systems go begging. The financial services supermarket in practice is aggregated, not integrated.
We’re starting to see the community banks and credit unions get more aggressive in their advertising— using a variation on the “small is beautiful” theme. For consumers, the difference in products, services and reach has started to narrow. By leveraging the Network, the small financial institution can be both small and big at the same time. In pre-Network history, being simultaneously small and big violated the laws of physics. In the era of the Network, any two points on the planet can be connected in near real time as long as Network infrastructure is present. An individual can have an international footprint. Of course, being both big and big allows a financial institution to take larger risks because, theoretically at least, it can absorb larger loses. We may see legislation from Congress that collars risk and puts limitations on the unlimited relationship between size and risk.
The Network seems to continually present opportunities for disintermediation of the dominant players in the financial services industry. Ten years ago, account aggregation via the Network seemed to be on the verge. But the model was never able to overcome its usability problems, which at bottom are really internet identity problems. We’re beginning to see a new wave of companies sprouting up to test whether a virtual distribution network through the internet can supplant the private physical networks of the established players. SmartyPig, Square and BankSimple present different takes on disintermediating the standard way we route and hold the bits that represent our money.
Once any Network endpoint can be transformed into a secure transaction environment, the advantage of the private network will have been largely neutralized. And while it hasn’t solved account aggregation’s internet identity problem yet, the mobile network device (some call it a telephone) has significantly changed the identity and network landscape. The walls around the garden represent security and engender trust. The traditional architecture of bank buildings reflect this concept. But the walled garden metaphor is built on top of the idea of carving out a private enclave from physical space. The latest round of disintermediation posits the idea that there’s a business in creating ad hoc secure transaction connections between any two Network endpoints. In this model, security and trust are earned by guaranteeing the transaction wherever it occurs.
There have always been alternative economies, transactions that occur outside of the walled gardens. In the world of leading-edge technology, we tend to look for disruption to break out in the rarefied enclaves of the early adopter. But when the margins of the urban environment grow larger than the traditional center, there’s a good chance that it’s in the improvisational economies of the favelas, shanty towns and slums that these new disruptive financial services will take root.