“I always look for industries where there’s oligopolistic behavior and archaic technology,” said one private-equity guy yesterday as he launched a new online lender. Sound thinking, but he should have added crushing rules to his hit list – taking this into account, it’s a no brainer to go after banks. The industry has made itself something of a sitting duck because it’s used to being oligopolistic and wary of change – remember the day when the OCC wouldn’t grant a new national-bank charter or branch approval if the applicant couldn’t prove it wouldn’t compete against national banks already entrenched in the market? In the wake of the crisis, banks have been slow to change their basic business model, lulled by years of oligopoly to focus not on the enemy without – non-banks – but on the enemy they first confronted – the regulators. As a result, an awful lot of energy has gone not into anticipating the new strategic landscape, but rather into vicious intra-industry squabbles. Little banks think they’ll thrive if they can only throttle the big ones, but their delivery systems are no safer – indeed, they’re at even greater risk because smaller banks have nowhere to go if they can’t offer fundamental financial intermediation services. A new McKinsey study says banks have three years at the most to figure out the new game, but the smaller and more retail-focused the bank, the shorter the grace period to get it right.

I’m old enough to remember the introduction of ATMs. When I was an MIT student in the mid-70s, the first hulking ATM made its appearance in Kendall Square. We all thought it cool, but then who wouldn’t want to push more buttons after spending a day key-punch programming (see the Smithsonian for exhibits thereon). However, then as now, technology marched on. By the early 80s, a few adventurous banks – there were some then – were offering ATMs, but the bank for which I worked – Bank of America – had no truck with such new-fangled notions. I distinctly remember its then-CEO saying definitively that customers liked going to bank branches – not that he’d been in one for years.

By the time in the late 80s the bank figured out that ATMs were here to stay, so too were a raft of more nimble competitors who redefined West Coast retail banking. A wave of M&A quickly ensued as banks big and small figured out that, if they couldn’t beat the competition, they could at least buy it off.

Now, they can’t. Regional BHCs may be able to buy themselves some time with some deals, but banks on either side of the asset-size barbell are stuck. Small ones generally know only their limited market and lack the operational capacity to expand, especially if growth bumps them up a size notch or two and adds regulatory costs. The biggest banks are of course under acute pressure to shrink, blocked not only by all the new prudential and resolution requirements, but also by ROE challenges that no theoretically-accretive deal can disguise.

The astute non-banker cited above is launching his online lending venture with the formidable backing of Blackstone. Private equity (PE) companies are the most astute and agile competitors yet for banks big and small. If you don’t agree, take a look at leveraged lending as a case history.

PEs like KKR are already well entrenched in a sector in which they started with an initial regulatory inch and then saw ways to take their profit a mile. The leveraged-lending market is in a bit of a hiatus at present, but it’s not because strangling banks with tough rules suffocated PEs. Rather, it’s because PEs spot a market heading to the crash zone and are saving their ammunition.

Think PEs only go after big fish? Take a look at mortgages and observe the huge stakes several PEs are taking in the distressed end of the market. Banks generally won’t go there due to legal-and-reputational-risk worries, but PEs are nothing if not courageous (or, less charitably, less burdened by examiners forcing compliance).

How did GE dispose of its financial activities when it decided that SIFI regulatory costs combined with market conditions showed it the way to the exit? Some major operations are of course being sold to big banks (Wells, Goldman) – a reminder that strategic M&A outside the basic financial-intermediation food chain is still a significant strategic option for strong GSIBs. A lot of GE is, though, going to PEs, PEs with the capital capacity to take big stakes in a wide array of financial activities. Even if they lose out to banks in the bidding, the price to the seller goes up and the profit hurdle for the capital-constrained bank acquirer rises in concert and, perhaps, at long-term risk.

The fundamental reason banks for decades ruled the financial system isn’t because banks then were smarter than now. Technology did give them an edge because financial-product delivery required physical presence, but even as technology changed, enough banks moved quickly enough to keep their monopoly going. Rules then were perhaps too lax, but for sure no impediment to attractive returns. Now, none of this is true – non-banks take the best and brightest with bigger paychecks than banks can proffer, technology is rapidly slipping out of bank control, and the rules are wholly asymmetric. Even when a bank can launch an innovative service, it’s increasingly forced to rent out its charter to a non-bank because it can’t put its struggling balance sheet to work.

This can’t last – without a concerted and coordinated policy that recognizes the value-add banks still provide – safety, soundness, capital, and market liquidity – the U.S. financial system will be unalterably transformed. Think you don’t like HFT now? Just wait.