The longer we face a phase of low interest rates, the more we see the thin margin and following profit generation from banks. In times with high interest rates, margin generation was much easier and the costs were covered still with a sufficient cost income ratio. These times are long gone and banks have to gain efficiency wherever they can find them.
How to recover?
And indeed, banks try a lot to reach the old heights again: They reduce staff, try to get economics of scale by merger or acquisition or gain more margins through new sophisticated products. All of these measures go in the same direction, to improve single topics or hot spots with specified instruments.
But what really is the situation, banks face? People still need current accounts, they need something for doing their savings, credits are still necessary for most of us to buy houses or even cars. In a nut shell banking is still necessary, but obviously banks not? If this is the case, who else is providing the products and services to the people? And more interesting, why is this profitable for these new providers?
Should the market be gone?
The answer to these two questions can describe the situation banks face. And these answers are not really hard to gather, because we see them in every day’s life. Every dealer offers payment on installments like the tech markets for TV or dishwasher, a lot of producing industry offers bank services to their clients or new customers as auto banks do and insurance companies offer products for savings reasons. So they all have a vivid interest in banking and to use their position to get the client closer to them by connecting her by her wallet. And of course all are starring at this super successful Fintechs with all their fancy ideas!
But who is really producing these services? This are still the banks, offering this kind of service now to the B2B world, trying not to lose the grab on the retail clients. Behind every new Fintech you have banks providing the execution. But it seems that banks losing the connection to the clients. And this is a part of reality. We are all using teller machines or credit cards but don’t care who is running these. It is not such a big thing to have a MasterCard instead of a Visa. It is all about payment and usability. Even more, it is about the benefits one gets by using a special credit card, like a card from an airline to collect miles.
Now we can speculate a lot about the reasons, why people love this Fintechs or other banking providers but not their banks, these well trusted and honored institutions of the past. But as people are still willing to give money to obscure investment channels popping up with great marketing and a lot of promises, we can put on records, there is a market for financial services. This situation is very similar to other industries, like telephone companies, the stars from the 80ties and 90ties or more obviously, this reminds me on the transportation industry. Today the big online shops are booming and inventing the most sophisticated techniques for storage, distribution and finding ideas to solve the last mile problem or gain efficiency in distribution. But these new solution seekers are not the big players like the well know, long market dominating players like DHL or UPS or other shipping companies. And guess who takes the profit?
Wait or get waited
Indeed, the pure transportation providers are not taking away the big share. And the very simple reason is, that thy needed ideas to survive and needed ideas to get both a good margin and a good growth. So that’s why Amazon or Zalando invest a lot of money to the areas, where actually a company like DHL should have the most knowledge. That’s why ideas come from the big retailers like Amazon or Zalando.
So what is the answer for banking? Digitalizations, as all scream around? Buying Fintechs and integrating them into the business? Maybe, I am absolutely a fan of digitalization, but only if the process is perfectly in shape. To digitalize a bad process just returns a bad digitalized process. I think the real reason for banks facing this situation is the way bankers do business. Coming back to my comparison with transportation, banks have the same problem. They do business as they did it since years or even decades with systems of the same age. Yes, banks have to stand the price of compliance and these are huge. Yes, banks can only stay profitable when having a significant seize. But this is valid for every business, seize does matter. What really hinders bank to be back in old glory is the missing capability of being a 21th century business. The industrialization of banking is much easier than many other industries. But as it was maybe too easy for banks so no one thought about disrupting the old systems and methods. And as we see, banking is more necessary than ever, we are talking about the service not the brand. Banks should start to integrate their solutions wherever they can. As no customer asks today, who is financing the good she wants to buy. This is the chance for banks. Why not turning this decision to a short twist on the banker’s app and the purchase is no longer in the hand of the tech market.
First make process smart, than digitalize them, that means good digitalization
But will this need digitalization or just purchasing a new Fintech? It is digitalization of 21 century processes. Then a bank can bring some fancy applications to the market, but first you have to streamline and reorganize the old machines and methods. Then the future will partly lay in digitalization! It is one key to be fast and smart to come back as a respected solution provider. But the really important step is to invent the products people need and deliver them fast and efficient.
Interesting times are ahead.!
Your K-Street6 team