The major
business model for large banks today are based on taking in deposit, add money
from issuing bonds and other funding, and then use the money for making loans
to private persons and companies. Interest in from loans is larger than
interest out to depositors and bond investors. The margin is the net interest
income to banks. For Nordea bank this business model accounts for 50 % of 2015
revenue, down from 54 % in 2014, and for DnB (the largest bank in Norway) it is
71 % in 2015 down from 78 % in 2014. The same trends are for most large banks
in Europe. |
Picture
from: www.lookandlearn.com, artist: Pat
Nicolle.
|
This
business model was invented by the Medici family in Florence in Italy around
1450. Before that banks only took deposit and stored it safe for rich families.
The Medici bank started to make loans to private persons and companies from the
money their customer deposited. In addition they put some of their own money on
the table (they was considered one of the riches families in Europe). They even printed their own coin, the Florin
that was used for trade among businesses all over Europe from 1450 to approximate
1650. (€ version zero)
We are at
the brink of a paradigm shift now. TBTF (Too Big To Fail) is replaced by (TBTC)
Too Big To Change, and is becoming a fundamental risk for all large banks. As
the total loan market have increased by approximate 6 % every year last 3-4 years
in Norway, large banks loan have increased by only 2-3 %. This means they lose
their market share, and within another 10 year they are not any longer system
critical financial institutions. The business model is simply not scalable any
longer in the digital age.
PayPal,
Apple Pay, Google Wallet, AliPay, Klarna and a bunch of other digital payment
platforms takes part of banks payment income. Crowdfunding, peer2peer loans
takes part of loans and corporate banking market. Bank Norwegian, IKANO, Audi
bank, GE Money bank, and other nice banks takes part of the highly profitable
loan market with a digital core and scalable business models. By digital core I
do not mean digital lipstick, like Vipps from DnB or MobilePay from Danske Bank,
I mean everything in the bank is digital, processes are based on digital
support and employees are selected to fit the digital delivery.
As Chris
Skinner write in his latest book “Value Web”, the biggest banking challenge is
leadership”.
I am 100 %
sure that the Blockchain technology will change the way most people do banking
in the future. I will write a new post on Blockchain next week. The question is
if banks will leverage or fail on the new technology. In the history many large
companies managed to leverage on new technology like bookstore opening internet
store to compete with Amazon and airline companies opening digital ticket booking
and boarding pass by smartphones. But
many have also failed like Kodak and Nokia, trying to fight the technology
rather than leverage on it.
