Banks vs Tech Companies – long term planning and thinking – is it possible?

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Most companies have  one, two, three or five year plans – some plan for longer but most organisations do not look beyond ten years as small factors can magnify and change, the political, business, technology and cultural environment change so dramatically that most companies do not think it is practicable to think in such long term – maybe following the famous Maynard-Keynes quote “In the long-run, we’re all dead”…

We recently were chatting with some ‘Googlers’ and their thinking was that Google will either be ten times as big in ten years or would have folded and the next ‘Google’ would have taken its place – they couldn’t predict which way it would go – too many external and internal factors and black swan type events plus consequences of the  unknown-unknowns.

So – with this background of uncertainty and change –  why do some companies notably Shell, other multinationals and governments have these twenty and thirty year plans and is there value for other financial services to think long?

Investment Banking Trends

Certain aspects of Investment banking is virtually a closed shop with extremely high costs of entry into many areas. Conversely IB is a people business with a small number of ‘rain-makers’ pulling in significant percentages of the fees with large highly paid teams supporting them. Some of the capital requirements for certain functions such as inter-bank FX broking are so great that only a handful of firms can operate

Technology, historically, can be game changing and reduce or commoditise functions and operations so is there an opportunity for technology to revolutionise the banking world?

Here’s some thinking on potential trends.

Short Term – Fund raising and IPOs

 

These have been controlled mainly by the big investment banks and this is where a large percentage of their fees are created. The costs of an IPOs is 5% or more of the value of the company so the costs are substantial.

Fund raising pioneer Google cut down on its advisers at its IPO and tried to minimise their costs by providing a ‘Dutch Auction’ of shares. With a globally known brand already in existence it would always be in the driving sear but the growth in information and knowledge availability, social networks, person to person and person to crowd communications there could be alternative paths for fund raising –on a small scale there are personal peer-to-peer lending and borrowing, could there be a market or exchange for business financing?

An Ebay for company funding?

Companies could be listed on the exchange and categorised on sector, risk factors, growth plans, management track record and then presented for ‘buyers’ to purchase shares in the company. The global availability of the information would mean a much greater potential market and the buyers could be individuals, investment organisations and groups.  Prices would be determined by demand/supply demand and an Ebay type bidding mechanism could be used which would cut off when the required amount of capital has been raised.

This concept would result in a reduction in the fees paid to Investment banks and lowering the cost of capital to organisations. The upside is that it would greatly increase the numbers of organisations coming to market who would still need some assistance and guidance. Also IBs could ‘buy-up’ shares in organisations they think are undervalued and then resell at a profit later.

Medium Term – Creation of Financial Instruments

Banks employ large numbers of the brightest minds to help innovate and build new products. Often these are new more exotic types of financial instruments to help sell or productise the debt and equity of organisations and governments.

The complexity of these securities has been often noted and the lack of clarity of the underlying assets make them potentially more risky when traded.

Technology will assist the decoding of these securities and getting an understanding of the underlying risk factors but technology will also enable more and more combinations and layers of asset types so it will be an ongoing arms race between visibility and obscurity

 

Long Term – Technology Companies become Banks?

Certain Technology companies have so much capital that branching out into other areas would be easy from a cash perspective (Google, Microsoft, Oracle, Apple all have multi-billion cash piles). To date they have used this to fund strategic purchases of complementary, rival or potentially future game changing companies.

As their technology markets mature could they switch to other money making market sectors? The companies could be perfectly positioned to move into certain aspects of the banking world.

(a)    Information and speed of access – this where technology companies really have an advantage. Banks have their own proprietary research but as access and availability of information becomes more open and faster this will reduce. Combine this with the technological innovation of the IT companies and the advantages the banks have will disappear. This could open up the financial markets and reduce the cost of entry allowing smaller ‘start-up’ firms and individuals equal standing but also would increase the total market size for tools activities such as broking.

(b)   Funding, mergers & acquisitions – again these companies have sizeable teams of analysts researching trends, competitors, partners and other organisations. They could use these skills combined with capital to help other firms merge, raise capital and expand

(c)    Retail – they have well known brands, global presence, superb technology platforms and innovative thinkers. If one of the big organisations decided to build an online retail bank it would very likely be a major success

Obviously technology companies are not investment banks but there is a certain commonality of –  significant concentration of creative bright minds and large amounts of money available. Tech companies generally will want to focus on their own growth but whilst other new innovative start-ups will always be there, the more mature organisation may want to spread their range of activities beyond this initial direction.

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Posted on : 19-07-2011 | By : richard.gale | In : Finance, Innovation

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Comments (3)

Richard,

Like the idea for the eBay for company funding – a bit like Kiva maybe. Maybe it could start and then float itself…

Not so sure about tech firms turning into investment banks – far too risky diversifying from key products and markets, especially in such uncertain times.

Thought-provoking though…

Damian

[…] of banks has been battered over the last few years they are still the guardians of our money (we’ve previously discussed the potential for tech/other companies entry into the market) and we already provide them with a great deal of information about ourselves and trust them to […]

Good post, thanks Richard. Your comment on the game changing nature of technology in financial services strikes a chord with anyone who lived through the Big Bang in the City. When I first started in IB I’d wander over to the Chicago Board of Trade every few days to watch the frantic closing in the pits. The introduction of electronic trading has certainly taken some of the thrill out of open outcry.

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