The music industry was a cash cow for decades. The business model based on selling music on a physical media, fan products and tickets to concerts worked well. The agreements and marketing strategies with artists were pretty standard: Either the record label “owned” the artist or the artist had their own record label (which became more popular especially in hiphop).
Then came the mp3 and streaming. Suddenly music could be distributed over the internet in good enough quality. The record labels were slow to respond and pirated music blew up in their faces. Even so, the music industry was sluggish to respond. First came LimeWire and Snapper. Then YouTube. Then came Spotify.
iPod may have put 1.000 songs in your pocket but streaming put ALL the music in the world in your pocket.
Technology changed the music industry into a more fragmented, fast moving industry. It unleashed the creativeness of artists and groups by allowing more people to produce professional quality music without studios and expensive gear. And it was technology that allowed many of these artists to release their music. The revenue streams changed from selling the physical recording to concert and apparel revenues, as well as other streams such as YouTube advertising income.
Banks have also been a cash cow for some time with a solid business model. Get deposits, leverage and lend out with a margin. Sell financial services such as funds and investment advice with a margin. Not exactly like a casino, but the house still mostly wins – at least if risk management is sufficient.
The threat that banks face currently is simple. Banking is largely an information technology operation. It’s all about digital transactions. Banks have been in somewhat oligopolistic situation where there are few large and efficient operators in any given market with little differentiation between them. So the market for the services has been in balance, even though not that much innovation has happened in those services from the consumer’s point of view.
This prolonged equilibrium has also lead to the banks’ IT infrastructure to becoming somewhat outdated. If there is no need to create compelling new digital services for the customers, why make expensive and capital intensive investments on the infrastructure?
PSD2 XS2A is EU legislation that basically gives third parties like fintech startups access to consumers’ bank accounts and payments. Luckily with consent.
Now, considering that my current “old school bank” doesn’t even provide a search function for account transactions, not to talk about any kind of analytics, it doesn’t take an oracle to tell that there definitely is space for user experience enhancing innovation in the consumer banking space.
If banks become utility or infrastructure type firms, their growth and profitability may be in danger. This is because competition will lower margins in their core offerings and the fintech startups will take their high margin “value added” offerings.
Fintech is not a new thing and there has been interesting stuff going on for years now. Also in the traditional banking world, for example Nordea, the biggest bank in Nordics is running a €1b core banking system modernization project called Simplification, aiming at making their services better for the customers by facilitating innovation.
My predictions are, that in the next 2 years we will see all of the following:
- M&A activity in the banking space will start to look more like tradition tech industry, where large, established companies such as Microsoft, Cisco and also Alphabet (Google) and Facebook acquire smaller companies with interesting technology and services. In this way, established companies control disruptive competition and get possibly a nice addition to their service portfolio.
- Established banks will merge together, as they look for efficiencies. They will become more like utilities or infrastructure companies, just like in traditional tech.
- We will see an explosion in real-time smart banking services, boosted with AI (Artificial Intelligence and Analytics). Consumers will get some kind of assistants (AI bots) that automatically help them find the best insurance depending on their location, activity, etc., as well as constantly looking out for better mortgage or investment/savings deals.
- Companies such as Facebook and Alphabet, as well as others will start providing banking related services. They have the technology and the capital as well. WeChat in China is already doing it.
What should the banks do? Well, most of them seem to be doing at least the minimum: Hiring developers and innovators and modernizing their IT infrastructure.
But one of the things that they need to tackle is the culture. However good the idea is, it is the execution of that idea that matters. Digital innovation where UX (User eXperience) is key, has turned into an art form. Banks are not necessarily known for their creative flare in terms of UX, but rather creativity in the numbers game.
One thing which could act as a fast lane to a fresher culture could be building ecosystems. Inviting the fintechs for a beer. Creating partnerships with cool companies that might not even be in banking or pure tech. Apple famously used artists in improving the human aspects of their products, resulting in amazing UX. Creative people could well come up with completely new perspectives and approaches to financial services.
Maybe banks need artists too?
- Mikko Laaksonen works as a Senior Development Manager at Fujitsu Finland. He currently works with New Business Development and EMEIA Innovation Community for Fujitsu’s global service offerings in the Nordics. Mikko has over 10 years of experience in Service Business Development, Product Management and Marketing & Sales. He holds a Master’s degree from Helsinki School of Economics (Aalto University) in International Business with a Bachelor in Economics, and in Marketing from University of West of England, Bristol.