Only one type of banking innovation matters March 27, 2011
Posted by nichebanking in Banking business model, Future of banking, Niche banking, Nicheruptive.trackback
Recently, I was reading a blog post from Market Insights called The Problem With Innovation. It was a well-written post, discussing the challenges with innovation in banking, whether innovation should be incremental or radical, and more. I contributed a comment, which got my mind working even further. Consider this post like an elaboration on my comment.
There are lots of types of potential innovation in banking, and many existing and startup companies are working on them–especially the incremental ones. But I think there’s really only one kind of innovation that is truly important: complete business model innovation. In other words, the only game changer will be a complete rewriting of the very core of the banking industry: the way banks and credit unions make money. There is nothing more fundamental to the entire industry than how they do these two basic things:
1) Add value to someone, and
2) Get compensated for that added value
Obviously, currently the banking business model is based on arbitrage–the banks’ ability to buy and sell money at different rates, and pocket the margin. Phrased in the form of the two above-stated questions, banks:
1) Add value to borrowers by loaning them money, and housing their deposits
2) Charge customers to borrow that money, at a rate higher than their cost of goods sold (their deposit rates)
(Yes, I realize banks get a few bucks here and there from other sources like fee income, but overall this is an arbitrage industry.)
But are these answers the ONLY two available answers to our questions? Based on the history of the industry, you’d sure think so.
Surprise, surprise: we say no. And that is exactly what we are working on here at Nicheruptive. Finding new ways to add value to different customer groups, and developing new and interesting ways to get paid to do so. While it is still too early (sigh…this is taking a long time) to tell you much about it, suffice it to say our P&L will look fairly different than your traditional financial institutions’ income statement.
In the meantime, chew on this food for thought a bit: what if banks and credit unions adopted other common (but nonexistent in banking) business models such as:
- Subscription model: adding value in a way such that a customer would pay a monthly fee to maintain access to that value. Think Netflix.
- Membership model: similar to the subscription model, adding value in a way such that a customer would pay annually to continue being part of the inside circle (Note to Credit Unions: No offense, but using the word “member” doesn’t mean you’ve got a membership-based revenue model). Think Costco, or your country club.
- Advertising model: adding value to advertisers by providing them access to a huge number of eyeballs, in such a way that they would pay for the ability to put their messages in front of those eyeballs. Think NBC, or Google Adwords.
- Commission: adding value by facilitating a successful transaction of some type, and doing so in a way such that people would cut you a slice of the pie for your help. Think business brokers, or share-the-settlement attorneys.
How could build a bank using one of these models? We have at least one idea…
Agree with your thinking. Financial industry is naturally/structurally “fat and lazy” and a bit of an echo chamber. I see this as a good thing as it leaves the door wide open for intelligent, disruptive innovations to flourish. Look forward to learning more about your venture.
Thank you, Sean, for chiming in. I couldn’t agree more–this industry is ripe for disruption…serious disruption, not just minor disruption. I’ll see what I can do.
As we progress into 2011 it becomes more obvious that the systems of our past are failing. Not simply a local matter, the banking systems in Europe and USA are under threat as overwhelming currency problems shape toward crisis. Do not expect a political fix anytime soon. Politics is incapable of fixing anything, itself now an arbitrage system between minimum accepted values and vested interests.
It is true that banking services are based on forms of arbitrage. The structure of banking largely revolves around clipping the ticket on all forms of arbitraged exchange. The structure of currency is closely aligned to that system and is itself contributory to the weakness.
It this of any great wonder. The USA has led the world for the last 100 years with its defacto World Reserve currency, yet the fiat nature is about to explode in volume and implode in integrity.
Where is stability.
Perhaps now the Christian mind will better understand the expression, God will provide he increase.
Perhaps we can better recognise that Gold derived fiat currency has no basis of real and enduring value, hence its long term (inter generational) usefulness as a measure and a store of value is limited.
Before you can devise a banking system that can retain intergenerational integrity, you have to settle on a form of currency measure that is of godly origin in order to ensure long term integrity.
My thinking tends to be directed towards a dividable commodity that has long term lasting and is self renewable so that the increase provided by god takes care of the cost of the currency and its administration and provides a form of passive wealth generation, which incidentally negates usary.
After which we can go on to look at systems that function. For a 21 year experience proof of model take a look at the not for profit Interest Free residential Housing lending of Liberty Trust. ( http://www.libertytrust.org.nz )
With over 20 million dollars lent and still lending even when banks are retracting, this model is a consumers ideal of absolute integrity, not a financial parasite on the community.
Look forward to others comments on this perspective.
Regards, Vern Wall
[...] Only one type of banking innovation matters: business model innovation [...]
I like the concept of the subscription. I work in the industry and have heard a number of times that customers don’t mind paying for the service as long as the fee is fair and consistent. I think consumers could subscribe to a level of product/service and then everyone knows what to expect. It’s not an unfamiliar idea as you pointed out, and honestly could be put into place with existing infrastructure.