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December 1, 2014

The Real Threat To Financial Institutions in the Digital Age


Christoffer O. Hernæs is executive VP of strategy, innovation and analysis at Sparebank 1 Group, Norway’s second-largest financial institution. An article by him recently published in TechCrunch is second to none I have read – and I have read more than a few – when it comes to explaining what financial institutions have to fear from the likes of Apple, Facebook, Google, PayPal or any other tech company deciding to get into the payments business.

Here’s the news flash: IT HAS NOTHING TO DO WITH ANY OF THOSE 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.”

What these tech companies are doing, according to Christoffer, is using the existing financial services infrastructure to capture value that will feed their business models. Meanwhile, because this is not seen as an attack on their “core business,” many incumbents 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. It has implications that may change things sooner rather than later.

Recently, a statement insert from a bank was dropped on my desk. This bank had a message for its customers and, without going into details that might give away the name of the institutions, the message was if your cards or accounts are compromised and you don’t let us know within a certain timeframe, it is “on you.” In fact, the bank was letting its customers know that if they waited long enough it was all “on you.”

My first instinct was to hold this up as an example of an institution that simply does not “get it.” After all, who is responsible for the security and safety of the banking and payments system in the US if not financial institutions? However, this statement insert is not from an institution that is out of touch. It is a message from an organization that is already facing the commoditization of its business.

After all, the water company doesn’t forgive the charges that resulted from a leak under your house that you didn’t know about. The electric company doesn’t tell you not to worry about it when you leave for a vacation and forget to turn the air conditioning down. They can’t afford to. They are in a highly regulated, commodity business.

In that statement insert, the bank was saying they could no longer afford to give their customers the security and safety they deserved likely because more and more of the value associated with their core business was being disrupted by various non-traditional players. This, according to Mr. Hernæs, is going to be a reality a number of financial institutions will face if they continue to see tech companies as a limited threat just because they are unlikely to become banks.

He states: “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 after the launch of Apple Pay, regardless of who said it first.


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