The Real Threat To Financial Institutions In The Digital Age

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Christoffer O. Hernæs is executive VP of strategy, innovation and analysis at Sparebank 1 Group, Norway’s second-largest financial institution. His thoughts were recently published in TechCrunch and are second to none I have read when it comes to explaining what financial institutions should fear most about the digital age. 

Here’s the breaking news he offers about that fear: IT HAS NOTHING TO DO WITH TECH COMPANIES WANTING TO BE BANKS. Mr. Hernæs explains, “The cost and complexity of running a bank is not compatible with the fundamental business model of tech companies, and meeting the capital requirements, compliance and overhead associated with running a bank is perhaps best left to the banks.”

In addition to this incompatibility between the realities of banking regulatory landscape and the valuations tech company shareholders expect, organizations such as Apple, Google and others are too smart to pay full price for something they can get at a great discount that does support their “fundamental” business models. 

Instead of “becoming a financial institution” and having to absorb all the costs inherent in providing and/or supporting various parts of the infrastructure that delivers the financial services consumers use, these tech companies are simply using the existing financial services infrastructure to drive the strategies fueling the growth of their businesses.

Meanwhile, because this is not seen as an attack on their “core business,” many financial institutions have a mindset similar to Alfred E. Neuman, the fictitious mascot and cover boy of Mad magazine, “What – me worry?” 

However, worry they should because disruption is not about technology. It is about using technology to improve the access and experience of the consumer or business being served – or underserved (as most often is the case). When it comes to doing battle with tech companies in this regard, too many financial institutions face long odds. 

Those chances diminish even more if the tech companies successfully capture so much of the value in the infrastructure that the core business of banks and credit unions is essentially commoditized. Maybe for the giant institutions this is less of a worry given their scale and profitable corporate side of the house, but, for the other 99 percent of organizations that don’t count assets in trillions, it should give pause. Especially if they take the time to read Mr. Hernæs description of the similarities between the challenges currently faced by telcos and the positions financial institutions may find themselves in a few years:

 “Where yesterday’s customers went to the bank as a one-stop shop for all financial services, the customers of the future can choose from a wide range of financial services delivered from third-party solutions…For all these services to function someone has to manage ledgers and settlements, maintain checking and savings accounts, as well as meet capital requirements, manage risk and comply with governmental directives and regulations. With traditional banks as that someone, the development is eerily similar to how telcos are stuck with managing and building information super-highways in order to provide sufficient bandwidth for YouTube, Netflix, Hulu, Spotify and a wide range of OTT service providers that benefit from high speed internet connections in order to profit.”

Many credit Winston Churchill with saying, “Those who fail to learn from history are doomed to repeat it” but actually it was George Santayana who wrote (in The Life of Reason, 1905): “Those who cannot remember the past are condemned to repeat it.” Never have there been more apt words for the banking industry in these heady days, regardless of who said it first.