NEW YORK CITY -- The Liberal victory in Ontario means that taxpayers have handed over governance of the province to the ratings agencies and their lender clients. That's the result of years of poor judgment and fiscal recklessness during the Liberal tenure.
Borrowing will be more expensive, taxes will have to increase and services will be chopped, including nurses and teachers.
As if that's not bad enough, Toronto's and Ontario's cash cow -- banking -- is going to face increasingly rough seas. This won't happen immediately, but a steadily downward trajectory affecting profits and employment is clear.
At a recent high-level conference in New York on the future of finance, the news was great for consumers but grim for the world's bankers. In essence, banking is going to be "disrupted" just as newspapers and TV networks have been. The term "disrupted" is Silicon Valley speak for saying that the banking sector and its business model will be undermined and eventually destroyed by technological innovation.
Disruption has gutted the music and media business already. In the past six years, 50 per cent of all journalists across the U.S. have lost their jobs permanently because of Google, Yahoo, Auto Trader, Craigslist and countless other online purveyors. Advertising revenues have been diverted or destroyed by these entities, which have also enabled advertisers to self-advertise.
Networks are now starting to feel the pain that newspapers experienced as viewership declines and as technology allows people to zap through or avoid commercials, thus eviscerating television's revenues.
Likewise, the traditional bank is being disrupted.
This will affect all banks in all countries, even in Canada where banks avoided the banking collapse in 2008 and are among the five strongest and most solvent institutions in the world. But they are going to have to migrate quickly into new technologies and their gigantic and expensive operations will have to disappear.
Innovative tech startups are popping up, offering the same services as traditional banking for a fraction of the price.
The Bitcoin phenomenon, for instance, is not so much about a new virtual currency, but is a profoundly disruptive banking innovation in which deposits can be stashed and transfers cleared safely without intermediaries raking off large transaction, bank or brokerage fees.
Ric Edelman, CEO of Edelman Financial Services (ranked top independent financial advisor by Barron's and manager of US$13 billion) said at this week's conference "most advisors will be out of business in five to 10 years and changes will force financial advisors to change the value proposition."
Online services will not only "disintermediate" advisors who get large fees, but cellphones are becoming the banks, wallets and credit cards of the world.
For example, I recently paid a consultant by cellphone on the other side of the world. I wrote a cheque, photographed it on my cellphone and emailed it to her email address. She's currently in a country in which banks are corrupt.
She took the image and with a simple app on her mobile was able to cash the cheque without delay. Her transaction fees were negligible.
Most of the world is "unbanked", such as this, and mobile banking is sweeping the globe. In some portions of Africa half of all financial transactions are conducted between two cellphones on a program provided by cellphone companies for pennies.
In the United States, tech-savvy "millennials" -- who have grown up reading headlines about rotten banking practices, huge banker bonuses and banking failures -- are flocking to mobile banking.
Startups are attacking credit cards, low-hanging fruit for which companies charge merchants 2.5 per cent per transaction to join their network. One interesting player is Ben Milne, CEO of Dwolla, who is providing a new payment network.
"We charge 25¢ per transaction and people who spend less than $10 are not charged any fees," he said. In just a few months, his startup has attracted 35,000 merchants and 500,000 customers who can open an account with Dwolla by providing a simple piece of identification like a drivers licence.
Besides credit card business models, traditional banking will be under siege.
"Banks with a branch on every corner are ripping off customers who are paying for all that expensive and unnecessary overhead," said Jay Sidhu, CEO of Customers Bancorp and Banc Mobile.
His bank charges a fraction of traditional banking fees and his mobile bank even less because "banking can be delivered by cellphone instantaneously and accounts are cleared in minutes, not days."
Slow clearance means huge profits for banks that earn profits while they hold our money. "U.S. banks last year made US$32-billion on overdrafts, more than is spent on research into breast or lung cancer."
Sidhu was in traditional banking as CEO of Sovereign Bank with US$90-billion in assets, and said that in three years Customers Bancorp has attracted 1.1 million chequing account customers. "To compare, at Sovereign I had to buy three banks in order to acquire 1.1 million chequing accounts," he noted.
His bank now has US$5-billion in deposited assets and is growing by 97% annually. He forecasts that his mobile bank operations will have two million chequing accounts within two years.
"J.P. Morgan cannot compete with us," he said. "The customers are ahead of the banks which are not efficient and too expensive. It's about time, too."
This article originally appeared in the National Post.
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