The traditional banking model is under threat and a new one is emerging. But, asks Brian Caplen, can it be profitable?
To gauge the scale of the threat to banking, one only needs to look at what has happened in other industries – the music business disrupted by Spotify and iTunes, taxi services by Uber, hotels by Airbnb, department stores by Amazon, publishers by Facebook and free online news.
Typically, the profits of the old model are undermined before the profits from the new model start to come through.
Far-sighted banks are now talking about building or engaging with a platform model because they can see that if they don’t embrace this change for financial services, one of the tech giants will pull the rug from under their feet. But can you disrupt yourself, watch your traditional revenue streams disappear, and tell the shareholders to hang on for a couple of years until the new revenue stream arrives? For most CEOs, that is akin to committing suicide.
There are no easy answers but the first step is to nail down exactly where those new profits are coming from. In his latest book, Digital Human, The Banker’s columnist Chris Skinner says that “a bank that is truly into its digital journey would never build anything but would curate everything”.
Mr Skinner argues that the old sources of revenue – margins on loans and commissions on the bank’s own products – will be replaced by commissions on a mass of products and services provided by third parties.
These commissions will be small but the successful bank platforms will process millions of them. In addition, banks will need to gather and use data to provide “personalised digital advice [that]... customers would pay for... [and] value-adding information services about the customers financial lifestyle”.
In Digital Human, Mr Skinner posits that huge volumes of admin work can now be done by machine and that the company CFO can be replaced by an algorithm. In my view, correctly working out the discounted cash flows for a bank undergoing a platform transition requires a CFO who is both a genius and a bit lucky – two qualities artificial intelligence can never replicate.
The winners will be those who figure out exactly what tasks should stay with humans and those that can be delegated to machines.
Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen
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