The theory of the long tail, developed by Chris Anderson, and covered in this Economist article, shows that money can be made on the periphery of an industry, without being a hit.  This is a phenomenon built on the internet.  It is interesting to apply that theory to banking.

Economist.com | Articles by Subject | What the long tail will do

The niche, the obscure and the specialist, Mr Anderson argues, will gain ground at the expense of the hit. As evidence, he points to a drop in the number of companies that traditionally calculate their revenue/sales ratio according to the 80/20 rule—where the top fifth of products contribute four-fifths of revenues.

Ecast, a San Francisco digital jukebox company, found that 98% of its 10,000 albums sold at least one track every three months. Expressed in the language of statistics, the experiences of Ecast and other companies such as Amazon, an online bookseller, suggest that products down in the long tail of a statistical distribution, added together, can be highly profitable. The internet helps people find their way to relatively obscure material with recommendations and reviews by other people (and for those willing to have their artistic tastes predicted by a piece of software) computer programs which analyse past selections. (mirrored here)

Internet allows small niche firms to achieve marketing scope and scale, yet maintain low operating costs, so achieve good profits.  While they don’t beat out the big guys in volume, they actually extend the market and make it bigger than it otherwise was,but will also take some volume away from the big guys.

In the Bank space, this sounds like, ING, HSBCdirect, Egg etc.  If that is the case this would explain the demise of Egg, mbanx, Wingspan, for trying to leave the long tail, and join the short bit with the big guys. Up there the benefit of the cheap scale and low costs are lost.

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