The traditional finance industry seems unprepared for digital disruption. The experience of the newspaper business could teach banks a thing or two.
Amazon announced recently that its lending business is gaining momentum – in the last 12 months alone, it has issued $1 billion in loans in the past year to merchants that sell on its marketplace. Meanwhile, after long-time speculation that Apple might one day become a bank, Apple has just launched a money-transfer service and a digital debit card that allows people who receive money from the transfer service to make Apple Pay purchases.
If someone today wants to build a bank from scratch, the structure is very different from the old banks. Finance is not an isolated island, but an integral part of many services – it’s much bigger than Apple Pay or Amazon loans. Yet it’s getting easier for new entrants to come in, and traditional banks seem unprepared for this.
To understand the situation, perhaps it would help to draw a parallel between the finance industry and the print news media business, which faced a similar dilemma over 20 years ago. There are lessons that traditional finance players could learn from their experience.
Let’s start by thinking about our needs for finance services in daily life:
- We need to pay for daily things, like lunch, groceries and coffee
- We need to pay utility bills and service charges, and wire money
- When we want to purchase something, we might need credit
- If we have extra money, we want to invest it.
Traditionally, we had physical money that we kept under our mattresses. Then banks offered a safer place to keep it. Later, they paid you interest if you kept your money there, and they could then lend the money for other people’s benefit.
All this sounds very simple. But it has become a very complex beast – we have banks that have tens of thousands of employees, billions of investments in IT systems that are mainly very old fashioned, and so much regulation that hundreds of people are needed just to control and oversee regulatory duties.
The newspaper industry also started with a simple idea that masks a complex reality. Running a traditional print newspaper required journalists and photographers who created content, editors and designers who put all the content together (including ads), typesetters to put all the right letters and photos into the printing machines, and people to deliver the papers to homes or newsstands. For the big publishers, this process easily included thousands of people. There were typically a few media companies in each country able to do all this.
Things started to change when it became possible to do the layout with a computer, send it electronically to the printer and print it without typesetting. It didn’t change the user experience, but it changed the processes and the resource needs for media companies.
In the 1990s, print media companies started publishing news and articles on the web. They could source news, photos and content easily from many places. After 2000, this development accelerated as it became easier, simpler and faster to get content, publish it and make the customer experience more interactive. But they were still printing physical newspapers and delivering them to readers, and their business model was still primarily based on that.
Returning our focus to the finance business, traditional banks needed a huge branch network to get people to deposit and withdraw cash, apply for loans, etc. Now we use ATMs for cash withdrawal, use cards for payments, and have our paychecks deposited electronically and automatically to our accounts. But this is really just finding new ways to deliver old services to customers – it hasn’t yet fundamentally changed the industry. In that sense, the finance industry is at the same point now that the newspaper business was in the 1990s.
Now look at the print news media today – today, blogs, social media and mobile apps enable anyone to publish content in seconds. News has become a commodity, the cost structure has totally changed, and companies need unique content and new business models to make money and compete – and not just against other traditional media companies, but also against the likes of Facebook and Google.
The finance industry is now starting to undergo the same level of disruption. You can literally set up a money account, a payment or lending service that costs 1/1000th of the traditional model. You don’t need super heavy IT systems and expensive systems integrators, and you don’t need a big workforce. You can take a cloud-based finance platform, have accounts for users, and enable them to transfer money and pay for things.
As we see from the list of daily finance service needs above, many of those services don’t need to be provided by a bank or a financial institution. For example, you typically need credit when you purchase something, so a credit service could be integrated with merchants. When you go to the grocery store or coffee shop, you can pay by transferring “bits” from a digital wallet (whether on your phone or in the cloud, or both) to the store’s account.
Banks must adapt
In principle, anyone can start any of these finance services. However there are of course a few restrictions:
- There is quite a lot regulation you need to comply with to manage other people’s money, lend money or offer other services
- People must find and trust your services – there are millions of Internet and mobile services people cannot find or are not willing to use
- People want to have a guarantee that their money is in safe hands and that they can trust the loan terms and investment policies.
That said, we are already seeing that people are already more willing to use new finance services, and this trend will likely accelerate. Finance regulators are also more willing to change their regulations, especially when they have also seen the huge issues and risks with the traditional finance models that have been based on big institutions that combine many different types of risks. And modern technologies also offer better solutions to build safe IT services with low costs, and give more control to users to see and manage their own money and instruments on the Internet.
Based on all this, we can expect three things:
- Banks must adapt to this new situation, start using modern technology and change their processes and offerings. They must also change their cost structure, including getting rid of many old and useless resources, including outdated jobs, IT and branches they don’t need – similar to what the old news media companies went through when technology enabled them to change their business models.
- Internet and mobile companies that have existing customers and services can start to include finance services in their offerings and integrate them to other products. This is how Google, Apple, Facebook, Microsoft, Amazon, Starbucks and others have become involved in finance services. In fact, software-based companies that are not tied to their own hardware – e.g. Google and Facebook – could be even in a better position than hardware companies like Apple. (Those same software platforms also enabled them to compete in the media industry.)
- Just we’ve seen thousands of new media companies arise to target niche audiences, there will be totally new companies creating new finance service niches. We already see things like real estate investing and lending services, but there will be many more specific needs.
The finance business has been slower to accept and adopt changes than other verticals like media, retail or travel booking businesses. But that is changing, and quickly. The new era of finance services will be based on the real needs of people and companies, not the limits of production technology or resources. Just as news media businesses no longer have their business models dictated by the needs of managing typewriters, typesetting machines, or delivery vans, banks and other “traditional” finance businesses must focus on fulfilling customer needs without continuing to rely on old resources – or endlessly trying to modify them to function in an era that has long since moved on.