Banks and their business model

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.