New Lending Models will Force Banks to Innovate or Fall Behind

Yvan De Munck  |

In a recent Financial Times column, it was argued – rather convincingly –  that bank growth as we have known it can no longer be taken for granted, and that things are about to go in the reverse direction. Nine specific reasons were given to make the argument, ranging from issues regarding compliance, capital requirements and loss of quality staff to factors like damaged reputation and technological "decay". (for a quick reminder of what we're talking about here, it pays to watch a recent presentation from Orchard's Matt Burton, where he talks about "green screens" - hilarious!).

On the other side of the argument, there are parties out there that still argue that the banks aren’t going anywhere any time soon. Their point is that banks still have massive size and other advantages that will come into play soon enough, and where they’re just waiting for the next downturn to clean out the "fluff in the field" as I tend to call it – and I tend to have sympathy for that side of the argument as well.

Banks Disrupted, but not Out

By now, it should be clear where I'm standing, and while I'm a fervent supporter of ongoing disruption in the financial value chain (p2p lending is only one example of this trend, but a very good one), I guess you could call me a centrist as well. Let me explain.

Banks are indeed not going anywhere anytime soon, but they do have a problem with most of their customers, and millennials in particular, and it needs to be addressed. I'm not going to enumerate all these issues here - again - as you can find enough musings on the subject all over the place. What they do have, though, is cheap funding, long standing and sticky relationships, branch networks, and at the end of the day, a sense of security by virtue of government guarantees and other related safety nets.

Therefore, what will happen is that a few banks will show the way, and it will be a way of collaboration in the sense of "if you can't beat them, join them". We are seeing this exact development happening already within the online lending space, as a number of community (i.e. regional) banks have teamed up with a number of the platforms, and basically outsource (part of) their core business to these platforms. Better to get 50% of something (revenue share), than 100% of nothing, right?

This is – and will continue to be – the way forward, so brace yourself for much more activity along those lines, both this year and further down the road. What amazes me is that none of the banks (in the US) is taking the opportunity for change seriously enough to jump in there, make a radical statement and come out swinging. Bank management that understands what is needed comes up with a plan and a budget, and starts a NewBank possibly in parallel with the existing franchise (though with very clearly different branding and positioning). 

Want to Survive? You Better Innovate.

The mandate would be to set up a category killer, starting from scratch (people, hard and software), and go out and do it, while at the same time incorporating all that is good from the existing franchise into the new format. Where is the new ING Direct ($ING)? Why not combine a Moven platform with an emerging online lender? Where's the truly mobile only bank? Where's the innovation?

Rather than all these banks setting up VC funds, buying into all these different pieces and waiting to see what sticks, it would be much better if they would also take the time to reinvent themselves and take matters into their own hands. Of course, that requires guts and bold vision, qualities that are by nature not easily associated with bank executives. It is time for a change. "Give me a place to stand (within an existing bank franchise), and a lever long enough (adequate funding), and I will move the (banking) world". Only then will we be able to say: "Le Beaujolais Nouveau est arrive!”

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