There’s a documentary on the festival circuit right now (it played in a few theaters earlier this year) and, as Hollywood hype would have it, it’s generating buzz. Called Downloaded, it documents the stunning rise and precipitous fall of Napster, the independent peer-to-peer file-sharing service that allowed anyone and everyone to post anything and everything they owned in the audio world. The music industry has never been the same since.
Even back then, it was an anomaly. Most entrepreneurs were launching dot-coms with dreams of high-value IPOs, while Napster seemed to encourage outright theft with nary a profit in sight. It wasn’t even around very long—Napster effectively functioned only between June 1999 and July 2001—but in that short time it signed up millions of members, revolutionized the way most people get their music and serves as a giant milestone in the online world.
So what does all this have to do with banking? Ask Peter Sands, group chief executive of international banking conglomerate Standard Chartered and a long-respected industry veteran. In a new and much talked-about piece for the Financial Times, headlined “Banking is heading towards its Spotify moment,” he asks a distinctly uncomfortable but vital question: Will the rise of new technologies do to the banking industry what file-sharing services did to music and book retailers? (Hint: It destroyed them.)
While it seems like a stretch to link the intricate workings of the financial industry to unauthorized downloads of Lady Gaga, it’s really not. As the piece points out, actual money constitutes only a tiny fraction of financial services. Most of it has to do with deposits and mortgages, or information and transaction. In other words, it’s eminently ‘digitizable,’ just like the new album from Jay-Z. Technology has radically transformed every industry and every practice built around exactly these commodities, and the traditional pillars of those industries have paid the price (think Tower Records, or the Borders bookstore chain).
To be fair, the banking industry hasn’t been nearly as blindsided as the music business was back then. It’s easy to remember how the band Metallica showed up with reams of documents bearing the names of fans who had illegally shared their music, which clearly cost them in the currency of cool. A range of artists joined their record companies in burying Napster under a hail of lawsuits. However, they had nothing to replace Napster with, which is why other file-sharing services instantly took its place. Meanwhile, millions of fans never understood that they should actually pay for music.
In our business, banks have invested billions in not just back-end but customer-facing technologies and services, from online accounts and digital payments to customized mobile apps. Many large corporations have directly launched or otherwise funded startups to experiment with technology-based offerings. There is a clear understanding that the genie is not going back in the bottle. Customers expect a raft of user-friendly online services, and they expect to pay less for those, not more.
But the central question—has the industry really developed viable replacements for the old banking model?—is still searching for an answer. After all, we still have mostly the same corporations offering the same services, only now with a mouse click or mobile app. What exactly is new?
The answers won’t be easy to find, as the lessons of the music industry show. There’s a whirlwind of complexity here.
In the first place, Napster was terrible for music industry stalwarts such as retailers and studios, but it was great for independent labels and musicians, who were able to find an audience they wouldn’t have otherwise. For example, alt-rock pioneers Radiohead got their first taste of success via Napster, and went on to make big money by touring asking fans to pay whatever they wanted for a new albums. Services such as iTunes showed that fans would indeed pay a premium for music they like. Spotify, the company mentioned in the headline of the Financial Times piece, is a joint offering from major record labels and is seen as the new incarnation of music downloads—it doesn’t sell music, per se, but a subscription to a cloud-based service (and it’s already drawn the wrath of Radiohead for not paying artists enough). Even Napster might become a viable commodity again—far from its origins as a rebel outfit, it became an online music store, got acquired by Best Buy and is now owned by Rhapsody.
In other words, there’s no single model to replace what existed before—a clearly defined set of developers (the artists), manufacturers (the record companies) and distribution channels (the retailers). Now, it’s a constant shift with new platforms and distribution channels, while everyone involved just tries to keep up. That’s the way it is in the technology-driven world.
The single biggest difference between the financial services industry and the technology business may be that the former doesn’t change very much or very fast, while the latter does. That’s just one reason why there are constantly new platforms and paradigms emerging, and new companies frequently at the top of the heap. The banking industry surely deserves credit for changing as much as it already has in the Internet era. But if recent history is any guide, it needs to change a lot more.