Bye bye banks

It is a crucial, open question whether Israel’s major banks will adapt quickly enough to the disruption of modern technology or become obsolete and irrelevant like the dinosaurs.

By SHLOMO MAITAL
Art by Avi Katz (photo credit: AVI KATZ)
Art by Avi Katz
(photo credit: AVI KATZ)
IF BANKS were people, Israel’s banks would be aging senior citizens with long white beards. Bank Leumi was born as the World Zionist Organization’s Anglo-Palestine Bank in 1903, and Hapoalim, Discount and Mizrahi banks were all founded long before 1948. Only First International Bank was founded after independence, in 1975. The five major banks have close to one trillion shekels (about $250 billion) in assets and more than a thousand branches.
Those are all reasons why Finance Minister Moshe Kahlon’s declaration last February that “10 years from today, maybe sooner, there will be no banks” is so shocking. Bye bye banks? Really? After a century or more? “In 10 years, you will lend to me, I will lend to you,” Kahlon explained.
What Kahlon referred to is the economists’ term, disintermediation – the use of technology to remove middlemen who come between buyers and sellers, or lenders and borrowers, and charge for it. The Internet has created the sharing economy, a market model where community-based online services match people who have resources with those who want to buy or use them, without intermediaries.
Take, for example, Uber. Uber Technologies’ smartphone application allows people to submit a trip request, routed to Uber drivers who use their own cars, and is now available in nearly 70 countries and 500 cities (not including Israel, where Uber is not yet legal). Uber’s market value now exceeds $60 b.
“Uberification” has come to mean applying the Uber model to other businesses such as travel (Airbnb) and crowdfunding finance (Kickstarter). Airbnb enables people with spare rooms to become hoteliers, and Kickstarter makes working people with limited funds into small-scale venture capitalists.
Traditional banks are intermediaries.They take our deposits and lend them to others. What if the Internet could Uberify the process and link borrowers and lenders directly? Why would we then need banks?
This is happening. Blender, a peer-to-peer lender launched in October 2014 and backed by Aviv Group, one of Israel’s largest construction companies, matches lenders with borrowers. Blender, now growing rapidly, uses social media and bank data, in part, to check out borrowers and has Blumberg Capital, a big American venture investor, as its advisor.
Perhaps in response, Bank Leumi announced a year ago that it too would enter the peer-to-peer loan business. I sense this may be a ploy to discourage other such startups; if you know Bank Leumi and its deep pockets are playing money matchmaker, you may hesitate to try it yourself.
At present Bank of Israel’s capital requirements make it very hard to start an Internet bank. This is changing. At the cabinet meeting on June 13, Finance Minister Kahlon presented the Strum Committee Report, which may pave the way for new kinds of banks in future, if its recommendations are legislated.
Today’s Generation Y (those born between 1980 and 1995) is smartphone savvy. Many do their banking online, using their phones, when possible. A study by Goldman Sachs reports that a third of the Gen Y “millennials” say they won’t need a bank in five years. Many have accounts with online trading firms, such as eTrade, which now offer them checking accounts and even pay interest. So, has technology now made those 1,000 Israeli bank branches obsolete?
In 1997, Harvard Business School professor Clayton Christen wrote a book, “The Innovator’s Dilemma,” in which he used the term “disruptive technology” to describe an emerging technology that unexpectedly displaces an established one. Often, disruptive technologies ruin long-dominant market-leading firms that are slow to spot the trend. For instance, digital photography ruined Kodak’s silver iodide film business. And now, cell phone cameras seem to be disrupting digital photography.
COULD BANKS be tomorrow’s Kodak? Today, mobile banks are growing explosively in Africa, where conventional banks are seen as shaky and 70 percent of those without bank accounts live many miles from the nearest bank.
Will mobile and Internet technology disrupt retail banks in Israel? Not only technology is disrupting conventional banks, but also zero interest rates. Why deposit money in banks, when there is no point or profit?
A booming new hi-tech industry is emerging, known as Fintech (Financial Technology), with many Israeli start-ups playing leading roles. Fintech is simply the ability to perform financial services from the comfort of your computer or your smartphone ‒ often banks need not be involved at all.
Some of this Fintech technology is designed to help conventional banks. For instance, one of the earliest Fintech start-ups, Cyota, established by current Education Minister Naftali Bennett in 1999, helped banks verify on-line transactions. But some of Fintech technology is definitely highly disruptive.
Take, for instance, money itself, and the strange story of Bitcoin. Developed by “Satoshi Nakamoto” (a pseudonym) in 2008, Bitcoin is a digital currency officially recognized by the US Treasury, freely bought and sold and accepted as payment by more than 100,000 merchants. No banks are involved. Bitcoins trade for real money; at present, each bitcoin is worth 2,200 shekels, and in 2014 its value was as high as 4,000 shekels. Not surprisingly, Tel Aviv was ranked fifth in the world for adoption of Bitcoin currency and was among the first cities to have a Bitcoin ATM open to the public.
Israel has its own Bitcoin version. Tomer Bariach and Avihai Rosenberg, who studied economics at the Hebrew University, created the Jerusalem lira, a virtual currency used to trade goods and services on the currency’s website with other group members. When you sign up on www.lirajlm.com, you get 100 liras free. If you offer a product or service for sale, you get another 100 liras as a gift. You can buy stuff by clicking on an icon and paying in “liras.” The founders say the “lira” is not intended to replace the shekel, but to trade alongside it. Such local currencies are proliferating all over the world, including in California and in Europe.
Globally, Fintech is exploding. Accenture, a consulting firm, found that global investment in Fintech tripled in 2014, to $12 b. and since then has continued to expand. A major catalyst has been the public’s loss of trust in banks in the wake of the 2008 global financial crash.
“This is the first thing the over 500 Fintech companies currently in existence have tried to achieve,” notes Maya Yarowsky on No- Camels, a website that covers Israeli innovations. “Taking traditional services like lending, deposits and payments out of the hands of the banks and putting them in the hands of the customer... It’s about rebuilding the trust breached by two centuries of financial crises with institutional banks at the helm.”
Peter Diamandis, founder of Singularity University, a Silicon Valley think tank, has said that finance will be “the most disrupted industry in the next 10 years… bank branches will mostly be gone this decade,” he predicted.
By 2020, two-thirds of the world’s population will be on-line, comprising another three billion global consumers. Will they bank conventionally? Or unconventionally, on-line? The answer seems clear.
In the United States, the number of bank branch closures was the highest in history last year. There are still 86,000 branches in the US, down from a peak of 95,000. There are 8,000 Fintech start-ups in the US and more venture investment in Fintech than investment in traditional banking. In Israel, a recent Bank of Israel report showed that while the number of bank of branches has fallen by five percent in the past three years, “the decline is less than that observed worldwide.”
Last January, I spoke at an Israel-China conference in Beijing. My Chinese publisher set up a booth there for me to sign copies of my book, “The Imagination Elevator.” I wondered how many dozens of transactions, during coffee breaks, could be handled fast enough to avoid long queues. No problem. In China, people scan a QR code with their smartphone, press a button – and payment is transferred instantly. Zero queues. For now, payment is transferred from their bank accounts.But how long will it take for pure Internet banks to arise, using this technology?
In the small city where I live, Zichron Ya’acov, a major bank has invested heavily in modernizing its main branch. Was this wise? Brett King, the founder of Moven, a top mobile-banking application, thinks not. He was recently quoted by Eric Rosenbaum, who blogs at CBInsight.
“The biggest banks in 2025 will be technology companies,” King predicted, “and banks that grew through branch acquisitions in the ’80s and ’90s, that grew by physical bank presence, they will have a real problem. They may have to give away the retail business.” He noted that many banks try to make their branches more modern, to look like Apple stores. But they are misguided.
“It’s not a design issue,” he explained. “It’s not branches not being pretty enough. It’s a behavior problem. People just don’t need branches, and this decline will speed up.”
According to IVC-Online, there are 500 Israeli Fintech companies, up from only 90 in 2002, and they raised more than $400 m. in capital last year. Many Fintech companies are linked with cyber security, a field in which Israel has strong competencies.
For example, BillGuard, founded by Rafi Ouzan and Yaron Samid, scans credit card and debit card transactions and alerts users to possible scams, billing errors, fraudulent charges and hidden fees. Ouzan told Yarowsky that he thinks such Fintech services “will eventually take over the banks.” BillGuard was acquired last year by Prosper Marketplace, a San Francisco-based peer-to-peer lender.
Some global banks are eager to leverage Israel’s Fintech creativity. Citibank launched Citi Innovation Lab here in 2013 and, since then, it has grown rapidly. Barclays and Commonwealth Bank of Australia are also active.
Among typical Israeli Fintech startups are Finupp and Paybox. Finupp’s software offers a cloud-based computerized financial adviser that facilitates tax refunds. PayBox helps us “pay and collect money with your phone.” Paybox CEO Tal Grinberg told Globes online that “a good product or service should meet a strong enough need or pain. The moment the pain is big enough and the proposed solution offers better value than the alternatives, the audience will seek, adopt and share.”
For us seniors, banking usually means dropping in to our branch and connecting with a familiar teller, who calls us by name. Even if sometimes we wait in a queue, the human touch is vital and reassuring.
But younger people find neither social nor financial gain in this. For them, “connected” means digitally via Facebook and their phones. It is a crucial, open question whether Israel’s major banks will adapt quickly enough to the disruption of modern technology or become obsolete and irrelevant like the dinosaurs.
The writer is senior research fellow at the S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com.