The crash protected banks from technology disruption - but it won't last

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It's clear today that the financial services sector has been protected from technological disruption as a result of the 2008 economic crash.

While industries such as retail and media have been thoroughly disrupted by internet, cloud and mobile technologies, banking has seen relatively little of the changes in consumer behaviour that brought the likes of HMV or Blockbuster to their knees.

A widespread conservatism, as bankers kept their heads down to avoid their fair share of blame for the recession, has combined with an increase in regulation to effectively entrench legacy IT systems in many major financial institutions.

In other sectors, the commoditisation of IT has broken down barriers to entry, increased customer choice, and encouraged disruptive new businesses to take on the inertia-bound incumbents. In finance, it's been almost impossible to do the same.

But things are changing, and the same process of disruption will inevitably shake the financial sector.

The collapse of the Co-op's plan to buy 632 Lloyds bank branches shows how difficult it remains to increase competition and open up the sector to new entrants. But the government is trying to foster such changes, by forcing easier access to global payments networks, for example.

There was much debate this week at Computer Weekly's CW500 in the City event for financial services IT leaders, about the relationship between regulation and innovation. There was some agreement that fear of regulation acts as an inhibitor to innovation in the sector, although other delegates felt that it was too easy to use compliance as an excuse not to innovate.

Undoubtedly, for most banks their hugely complex and costly legacy IT estate acts as more of a barrier to innovation than any regulatory authority does. After all, it was "innovation" in collateralising risk that led to the crash in the first place. Few finance firms have taken the bull by the horns and overhauled their back-office systems - Nationwide has a £1bn IT transformation programme in place, but there aren't many others taking such a big step.

But now we are starting to see glimpses of how the future might be different.

The banks have desperately tried to prevent the emergence of peer-to-peer mobile payment networks, but increasingly the likes of Google, Paypal, and network providers such as Telefonica are offering new ways to move money that bypasses the banks.

Germany has seen the world's first social media bank - Fidor is a start-up operation that uses Facebook as its primary means of customer acquisition and support. It even offers a savings account where the interest rate is influenced by the number of Facebook "likes" it attracts.

For a young, social media generation looking for their first bank, that's going to be an appealing alternative - and becomes especially disruptive if they stay loyal as they get older.

Customer behaviour is changing faster than most established banks can cope - offering a mobile banking app is one thing, using that as your primary means of customer communications is quite another. Eventually, that customer behaviour will be as much of a driver for change as government or regulators - and technology will be the means by which those customers force that change.

Like it or not, financial services will be disrupted every bit as much as other commercial sectors, with new entrants shaking up the established players as technology fragments the market. The big banks are blind if they cannot see it coming; they will of course resist for as long as they can, but like every other industry they will over the next 10 years be forced to embrace IT innovation or see their empires decline.

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