Banking on the next generation for finance innovation
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As the rate of change in the banking industry accelerates, Holvi founder Kristoffer Lawson shares his thoughts on where there is room to innovate and what this means for next generation banking.
Change in an industry is normally pushed by the fast moving force of innovation with new players finding gaps in the market, forcing existing competition to step back as they struggle to find the agility to fight back.
Normally, those suffering from innovator’s dilemma tend to be left behind; however, up until now, banks have managed to avoid this pattern. Rather than being challenged by the ‘other side’, they are actually toppling of their own accord under their very own weight; a process that is not likely to completely stop, no matter what bailouts are being given.
Instead, we are likely to discover that new models will be created which eventually force banks to either innovate, acquire other innovators or, more likely, watch helplessly as newcomers lead the way for the next generation of banking. Thus, new banking has never been more topical, with a widespread sense of rapidly approaching change. This is currently transforming the banking landscape with financial institutions risking disintermediation by newer more vigorous online banking platforms.
Don’t just think different, do different
Amongst all the change, a new generation has come knocking on the door; the millennials or Gen-Ys, vehemently pushing new innovation. But despite timing being perfect, many companies are still looking at the opportunities from a traditionalist point of view — the ‘I want to build a better bank’ approach, instead of questioning what banking even is.
The model that our banks have for long been built on is the idea of offering financial advice, accepting deposits and making investments, especially in the form of loans, making the passive customer the ideal customer. However, for the majority of people, the main purpose of a bank is to actually ‘store’ money, somewhat temporarily, and to make and receive payments. Consequently, traditional bank services are superfluous to the majority of a client’s daily needs.
To address these issues, rather than asking ourselves: ‘How can we do what banks do, but with tweaks to transparency and with more ethical investments’, we need to ask ourselves: ‘What are the new institutions and the new services we can build?’ ‘How can we implement current trends and innovate through integration of social features whilst supporting our community?’, ‘How can we build an ecosystem?’, ‘What could a better user interface look like?’, ‘Are there different business models to deploy?’
Holvi has ignored the traditional model completely and focused on offering the core functionality of a utility bank that reflects the needs of a modern customer, but without a heavy full credit institution license, and without the risk involved in investing customer funds onwards. With the approach Holvi has taken, the business model no longer needs to be tied to investments, but rather allows innovating in new areas. Thus, an ideal Holvi customer would be the opposite of a traditional bank’s targets, and is someone who is constantly moving money in and out — an active customer.
New EU regulations are accelerating development
The Payment Service Directive is opening the doors to companies which are able to provide many of the services of a traditional bank, with a few twists. This EU-wide regulation allows companies to hold customer funds, make payments, receive payments and more importantly, to offer this service throughout the European Economic Area.
Traditionally, bank customers have been very sticky with the joke being that you change your bank less frequently than your spouse. The main reason for this is that the services offered by different providers are all but identical, with minor differences in price, look and feel. Thus, jumping from one bank to another does not provide any substantial differences nor an improved experience. However, if we disregard our dependency on having a full banking license, and release ourselves from the old business model, we can create services that are radically different from what we are used to, yet much more efficient. Actually, so different that they will take the traditional banks by surprise.
Disruptive new companies emerge across the financial services industry
It is not just payment institutions that are going through a revamp. Loans, for example, are currently experiencing a minor peer-to-peer revolution, and lenders such as Wonga are ploughing their own trend in non-bank services. Foreign currency payments are another area that has recently been disrupted by new companies and models such as the peer-to-peer based TransferWise. Moreover, investment opportunities are being offered by a multitude of online companies and even credit cards are being issued and managed by third parties.
All of these developments are cutting out banks from their secure place in our monetary and economic system, resulting in a vastly more distributed and flexible network of companies. Banking for the internet age.
Fortunately we do not need to worry about banks dying as the next wave of financial services is already being built.