Banks’ core business model is broken
The traditional banking business model is usually using deposits to fund lending offers, however, returns from this model diminishing.
What could be the reason for the failure of the model?
If you think banks are receiving less in deposits then you are probably wrong because US banks alone received a record $2 trillion surge in deposits in the first six months of 2020 according to FDIC data.
The problem is the lending has become far riskier as households and businesses reel under the impact of the pandemic, leaving banks struggling to find worthwhile opportunities to lend.
Banks got used to the old business models they are unable to adapt and find new ways to generate profit and this is further reducing banks’ net interest margins and profitability.
By contrast, fintechs’ earnings are growing rapidly.
Many fintechs have exploited new business models and solved market problems by changing how they manufacture and distribute products.
What’s the core difference between these two business models?
Banks tend to start at their business model: to take deposits and lend. Then, they look for technology to reduce the cost of distributing this existing business model.
Fintechs start with the customer problem and then solve a number of other adjacent problems with digital tools. In turn, they build new business models around this joined-up problem-solving.
According to research by 11:FS fintechs demonstrate the principles of embedded finance and BaaS.
Consumer and business expectations have shifted. While established banks have upgraded their digital user experiences over the past two decades, the services that they deliver and their business model have not changed to match customers’ shifting expectations.
For example, in “Designing digital finance services that work for SMBs” 11:FS found that US SMBs believe brands like Intuit and Shopify are solving their most important business problems better than their banks are.
If we explore the business models of these companies and the problems they are solving we can see that banks had already known about these problems that businesses are facing and adjust their models.
Embedded finance demonstrates this changing perception. It’s the idea that finance appears at the point of need, rather than as a standalone product (e.g. lending at the point of sale).
Former Citi CEO Mike Corbat warned that banks risk becoming “dumb pipes” if fintechs and Big Techs take away customers.
Banks should take measures to catch up with the wave of changes.
