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Too big to innovate: Get excited for the coming disruption of banks

Don’t worry, banks. Video stores, newspapers and film cameras can offer a shoulder to cry on. They know how you are about to feel. Welcome to the world of disruption, where businesses get upended. The race is now on to chip away at banks’ businesses with cheaper and superior services that customers love.

As the full impact of software and the Internet washes over the global economy, more casualties will fall.  A reminder of a teetering domino came Sunday night when London start-up TransferWise announced it raised $58 million from investors, including Andreessen Horowitz, a prominent venture capital firm.

TransferWise lets users send money internationally without paying the hefty fees traditional banks have charged for such transfers. Its founders, two Estonian friends, got the idea after wanting to exchange Euros and British pounds. They soon realized the potential of a decentralized, peer-to-peer financial network.

Why pay 7.99 percent — the global average for remittance — to some bank when TransferWise will charge only 1 percent for the first $5,000 and 0.7 percent for any additional money?

It’s a no-brainer for anyone sending money across borders. TransferWise says it has saved its customers over $200 million in fees since launching four years ago. It plans to use its new funding to continue to grow around the globe. TransferWise says it is growing 15 to 20 percent a month.

The truth is, moving money shouldn’t be very expensive given today’s technology.

“In the modern day, money is really just data,” Seth Priebatsch, chief executive of a similar type of financial service company, told me last year. “Anything that is data eventually moves to the medium that can move it with the least friction, the most quickly and at the least cost.”

Priebatsch leads another company leveraging the latest technology to try to disrupt the traditional financial world. LevelUp processes restaurant payments for 1.95 percent, significantly less than what the Visas and Mastercards of the world offer. For businesses, small transactions such as a cup of coffee can be unprofitable because of fees to process the credit card transactions. (This is why many demand a minimum payment to use a credit card.)

The problem for traditional financial players is that their business models rely on expensive fees.

“They’re in a pretty difficult situation with their balances sheets and income. In that sense it’s very hard for them to say, ‘Hey we’ve been overcharging our customers. Why don’t we slash our hidden exchange rates by five times or 10 times to be competitive with TransferWise,'” said TransferWise co-founder Kristo Kaarmann. “Because they also have this legacy technology to keep up, the branch network, all the products that are costly to maintain.”

For the incumbents, there’s little incentive to innovate. Why disrupt your profitable business and its rich profit margins?

Max Levchin, the chief executive of Affirm and PayPal co-founder, gave a reminder of banks’ troubles at the Digital-Life-Design conference earlier this month. He noted that American Express is hiring software engineers to program with Cobol, a dated programming language.

“Seventy percent of computer science departments worldwide do not even teach Cobol. The top 10 computer science departments do not offer Cobol pretty much in any form,” Levchin said. “I guarantee people going straight out of school to work for AmEx to write some awesome Cobol code are not from the top 10 computer science departments. Basically we’re going to hire dummies — well not really — but not the creme de la creme. The creme de la creme is going to go disrupt Cobol.”