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Banks As Commodity Utilities In A New Payment World

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Editor’s Note: Christoffer O. Hernæs is vice president of strategy, innovation and analysis at Sparebank 1 Group, Norway’s second-largest financial institution.

With the recent launch of Apple Pay and leaked screenshots of Facebook integrating payments with Facebook Messenger fintech companies, there is a lot of speculation regarding the future of banking. Backed up by the way-too-often quoted Millennial Disruption IndexAccenture’s Banking 2020 and a range of similar reports tech evangelists predict that Apple, Facebook and Google will become the banks of the future.

This is highly unlikely, not because of lack of abilities, but rather because the challengers don’t want to be banks. The cost and complexity of running a bank is not compatible with the fundamental business model of tech companies, and meeting the capital requirements, compliance and overhead associated with running a bank is perhaps best left to the banks. This creates another scenario that should be even more frightening for incumbents where traditional banks are reduced to infrastructure providers.

The fact that most fintech startups and challengers from the tech world are using the existing infrastructure combined with extensive regulations supports this scenario, but also creates a false sense of security for incumbents, where giants like Bank of America and Capital One say not to worry since challengers are not targeting the core business of the financial sector. This attitude is what makes the financial sector ripe for disruption. After all, disruptive innovation is based on the idea of introducing new ways of doing things, often to an underserved market.

I have previously argued that payment processing is in danger of becoming a commodity, but the threats to incumbents span much wider than payments.

P2P lending is no longer limited to payday loans and consumer finance. Social Finance has already entered the student loan segment with over $1.3 billion in refinanced student loans and is targeting the first-time home buyers and the corresponding mortgages in its next move.

Funding Circle is rapidly expanding its SME loan portfolio, and has currently issued £369 million in loans to 5,000 companies. But P2P landing does not only disrupt traditional loans, but creates new investment opportunities for institutional investors.

The law firm Richards Kibbe & Orbe estimates that 80 percent of the investments in the U.S. P2P market originate from private equity and hedge funds, where the latter uses P2P loans as a way to invest directly in the debt market without commercial banks as intermediaries.

At the same time crowdfunding platforms like Kickstarter are providing new funding options for capital-seeking businesses, as well as giving retail investors access to investment opportunities previously limited to institutional investors and high net worth individuals through large commercial banks.

With the emergence of the term “moneyhawks” many firms saw the way banks targeted the wealth management segment was up for renewal. With automated services based on intelligent algorithms Wealthfront secured $70 million in growth capital to secure further growth after reaching $1 billion in assets under management since its launch in 2011.

Looking to the financial sector for new opportunities is not limited to lean Internet companies and startups, but technology behemoths like SAP are entering the financial sector through partnerships to streamline transactions and Basware joins forces with MasterCard with an automated supply chain platform.

Where yesterday’s customers went to the bank as a one-stop shop for all financial services, the customers of the future can choose from a wide range of financial services delivered from third-party solutions like Mint for personal finance, P2P-loaned providers for both consumer finance, mortgages and more, Square for merchant services, Ant Financial for business loans and Quickbooks for payments, accounting and payroll without ever needing to contact or log on to your bank.

For all these services to function someone has to manage ledgers and settlements, maintain checking and savings accounts, as well as meet capital requirements, manage risk and comply with governmental directives and regulations.

With traditional banks as that someone the development is eerily similar to similar to how telcos is stuck with managing and building information super-highways in order to provide sufficient bandwidth for YouTube Netflix, Hulu, Spotify and a wide range of OTT service providers which benefits from high speed internet connections in order to profit.

To cope with the development telcos like AT&T, Comcast and Verizon has tried entering peering agreements with service like Netflix in order to secure some of the revenue generated on top of their infrastructure as a last attempt to turn the tides on a battle lost a long time ago. Ultimately President Obama stated that the Internet should be viewed as a basic utility and commissioned the FCC to protect the net neutrality and a free Internet.

With the rise of a new fintech ecosystem on top of the existing infrastructure, is the development in the telecom sector a foreshadowing of the future fate for traditional banks? To stay relevant, banks must embrace the technology-driven changes and look for new opportunities rather than protecting and preserving antiquated business models.

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