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Will Technology Kill off the Banks?

Technology could be about to remove not just a range of traditional jobs, but an entire tier of employment, the ‘middle man’. Already an inelegant word has been coined to describe the process, ‘disintermediation’.

The Executive Director of financial stability at the Bank of England, Andy Haldane, said the financial crisis beginning in 2008 had been ‘a failure of data and risk management systems’, and the technology put in place to prevent it happening again, ‘could make banking middle men… surplus links in the chain’.

Reporting on that in the Daily Telegraph (15 March 2012), Philip Aldrick wrote that that banks are already ‘disintermediated by technology’, which meant that a mobile phone operators (in Kenya) is offering a payment service; Zopa and Funding Circle in Britain have developed commercial peer-to-peer lending. So have Crowdcube, as reported in a recent MBF blog about comic robots.

These schemes link borrowers and lenders without need for an arranger. The day of the middle man in any field could therefore be numbered.

Inevitable and makes sense, perhaps. But will it logically be followed in every other sector. Cars, white goods, books, clothes direct from the manufacturer, why bother with the retailing sector? Insurance policies straight from providers?

Almost a decade ago, A. Michael Baker wrote on the US-based IDM Marketing site, addressing representatives of the motor trade, ‘there are already thousands of web sites offering automotive products for sale online’. The question was (and still is): whether manufacturers will sell to the consumer direct. That’s disintermediation.

By 2003 it was already under way. Some manufacturers sell direct, others go through online agents taking orders for nominal commission. Either way the local retailer is not used, the profits are bigger for the manufacturer. The traditional performance chain is being transformed.

It seemed they would sell direct or only through high-end, high volume distributors. Smaller ones might become little more than warehouses, but most would vanish. Baker identified a war for market share between ‘traditional mail order retailers and the new internet giants’.

The business model was built on massive volumes, ‘perfect operations efficiency’ and razor-thin margins. Baker predicted that in the war for customers among manufacturers, etailers and mail order companies, small distributors would go, then medium sized ones leaving the winners to find ‘just how difficult it will be to take, process, and ship thousands of individual orders every day. What they thought were going to be big margins will disappear as they sink in the quicksand of an operations swamp’.

Then there would be massive industry consolidation, as many fell. He felt that Amazon had succeeded by building its own massive distribution system, emulated by supermarkets, for instance.

His advice to the motor trade was to see the internet as just another channel of cheap, efficient communication. No manufacturer would make the internet consumer direct business model work (well, some have in things like clothes), and in effect the distribution system would re-exert its place in the business. The retailer/e-tailer would be reinvented. It would be like a circle.

In 2003, he could say that customers want to see what they are buying and take it home with them. Since then, of course, augmented reality means they can see it and try it on virtually. So, perhaps less circle, more spiral?


IDM Marketing. A Michael Baker, Disintermediation.

Image: Tom Jolliffe