Forces from outside finance are set to disrupt the banking industry. Here’s how.

From the crash of 1929 to around 1981, banking was generally considered a fairly dreary business—something people did to pay the rent, but not something they aspired to do. It tended to be a highly regulated, often local, lucrative but not extraordinarily lucrative line of work.

That image began to change in the early 1980s, at roughly the same time as the profitability of the industry began to skyrocket. As a share of US GDP, financial services grew from 2.8% in 1950 to 4.9% in 1980 and 8.3% at their peak in 2006. Attracted by high wages, the elite went into banking in droves: in 2008, 28% of Harvard graduates went into financial services versus 6% in 1973.

Of course, following the crash of 2008, policymakers in the mature economies decided they needed to better regulate an industry that seemed to explode once or twice every decade, investors lost their enthusiasm for bank stocks, and the party ended.

…Or did it?

Between now and 2025, banking seems likely to undergo a digitally driven transformation that will transform how we save, spend, borrow and invest their money. Even as regulators do their best to try to make banking a boring business again, and politicians still vow to rein in the “banksters”, a number of well-financed start-ups look poised to reinvent almost every aspect of finance as it’s been practiced for at least the last 100 years—and could even make banking sexy once more.

In this series, we will look first at how regulators’ push and FinTech’s pull may be setting the stage for some dramatic changes, then at what those are likely to mean in retail banking, lending, and investment banking in the developed and, more profoundly, in the developing world. Finally, we will consider the ramifications of one particular technology, the blockchain, the distributed ledger technology behind Bitcoin that many in FinTech believe will be the most critical element of this revolution.

Part 1: An “Uber Moment” Ahead — Or A More Efficient Oligopoly?

For many years now, Professor Nicholas Valerio of Emory University’s Goizueta Business School in Atlanta has led a group of MBA students on a tour of Wall Street. One informal economic indicator he watches is how much food the banks serve when they greet the group. The prospective Masters of the Universe usually see full meals in a good year, sandwiches in an okay year, nuts and soda in a bad year.

This year was a good year judging by the food index, but Valerio thinks that the motivation has changed: these days, he says, banks must work much harder to recruit the best and the brightest. Many of the smartest MBAs want to go work in Silicon Valley, not a bank. “The overall trend in the industry is that it’s more competitive now,” he says.

Much of the excitement in the start-up world is financial, however. Nor are they alone: Banking is not known for being an especially loyal business, and a striking number of the most recognizable names in banking, including John Mack, former CEO of Morgan Stanley, Vikram Pandit, former CEO of Citigroup, and Hans Morris, former president of Visa, are all involved in financial technology start-ups.

The students’ and former executives’ instincts may be right. Antony Jenkins, the former Group CEO of Barclays, declared in a recent speech in London that over the next 10 years, the banking industry will face a series of highly disruptive “Uber moments”.

Jenkins predicted that disruptive outsiders may have the same financial impact on banking as Uber has had on the traditional taxi cab business. But with a difference: a lot of the FinTech fleet is self-driving. Overall, Jenkins guessed that the number of people employed in financial services will shrink by 20-50% over the next 10 years, in the face of low-cost competitors that offer customers better service and more convenience, and to investors a promise of lower risk.

Traditional banks will face the kind of long struggle that the traditional telephone companies faced in the 1990s when pitted against the new mobile phone industry, he said.

In addition, banks have faced challenges from regulators, particularly in the US and the UK, whose restrictions have begun to trim banks’ profitability by requiring them to hold larger deposits, restricting their ability to trade securities for their own account, and requiring that a fair market value be declared for every contract and asset they hold—a difficult proposition if the contract or the asset isn’t liquid.

The upshot is a note of pessimism in the traditional banking world. “The great age of finance is done and banks are going to be far less interesting,” says veteran bank analyst Christopher Whalen, Managing Director of Kroll Bond Rating Agency in New York.

Enter FinTech

Meanwhile, FinTech is in a happier time of life—those childhood years when all the kids seem above average. Global FinTech investment grew sixfold over the past three years, according to a recent KPMG report. The total reached $20 billion in 2015, a 66% increase over 2014’s $12 billion. And next year? Some analysts are predicting it could rise again, to $25 or $30 billion.

That might sound like a lot of money, but Goldman Sachs estimated recently that new services powered by technology and social media could represent a $4.7 trillion market opportunity that will not only take market share from traditional banks, but could reach many others with new products.

On the face of it, digital technology seems likely to give financial services the Facebook treatment—democratizing financial services and pushing costs down—but in countries where financial services are deeply entrenched in the economy, this may not be as inevitable as it seems.

Scott Anthony, Managing Partner of Innosight, a Singaporean consultancy specializing in innovation, is skeptical that the industry will see any Uber moments. “Uber, smartly, goes after a fragmented market filled with undercapitalized local incumbents who can’t materially marshal any defense against its incursion. FinTech start-ups are going against some of the most well capitalized, competitive businesses in the world,” he says.

Whether the old guard wins will depend more on how well it plays the games, in his view. “Smart incumbents who embrace digital disruption to reinvent their core business and power new growth businesses will do well; those who don’t will fall behind,” he predicts.

Not so fast

But the banks’ fortunes may not depend entirely on technology. Thomas Philippon, a professor of finance at New York University’s Stern School of Business, has found that the current financial system in the US seems to be no more efficient at transferring funds from savers to borrowers than the financial system in 1910.

Although retail and wholesale trade, for example, has decreased as a share of the economy by about 20% since 1970, thanks to better technology and greater economies of scale, financial intermediation reached 9% in 2010—far above its historic economic cost, which grew from 5% in 1980 to almost 9% of GDP in 2010, Philippon notes.

Nor have computers—think of all those ATMs—made much difference. So far, he has written in a 2014 paper, although in most industries, greater IT investment coincides with lower prices and lower shares of GDP, in finance, the opposite has happened: the more financial services have invested in IT, the larger their share of income.

Philippon is unsure why, but Ann Rutledge, CEO of R&R Consulting in New York, an independent credit analyst, thinks it’s pretty simple: “The real problem is that in banking, on average, banks take too much money. Why do you think that an institution that makes change, four quarters for a dollar—how do they get to be so rich?—because that’s all banks really do in the end, is give you change. The answer is that they know how to overcharge their customers.”

Whether this dynamic changes or not, Andrew Odlyzko, a professor of mathematics at the University of Minnesota as well as a longtime student of innovation, believes that financial services will eventually be dominated by just a few players.

“There are very strong network effects in operation, so that in the absence of regulatory constraints, you are likely to get a monopoly,” he says. “… you might end up with a duopoly, as in Visa/MasterCard, as various powerful commercial groups might not be willing to tolerate a monopoly. But that is probably all,” Odlyzko predicts.

Nor is he optimistic that regulation will prevent this concentration from happening. “Now, regulation might lead to slightly more [competition], but perhaps not for long, as with time the economic pressure might overcome even the political resistance,” he adds.

Next: Retail banking in 2025