The Bankwatch

Tracking the consumer evolution of financial services

A new future based on a different revenue model is needed for banks

Something has been bothering me for some time, and now the planets are beginning to align.  One of the promises of Internet is a future which is more efficient.  This literally means less money changing hands to get things done. can occur with zero overt marketing costs, based on personal contribution of willing advocates.  Costs do not go to zero – it is not that simple – but costs are less than before by a considerable margin.

The Spider and the Starfish touched on this point in 2006.

“as industries become decentralised, overall profits decrease”

My summary at that time was:

The book rightly points out that in the decentralised world of internet, profits don’t just shift from old channels to new ones – they disappear. It speaks about CraigsList that diverted enormous amounts of classified ads from paying newspaper ads to free internet ads. Revenue disappeared. Recall that classified were a mainstay of newspaper revenue.

Granted the focus of the point and in reflection of much of the discussion in 2005 & 2006, was the survival of newspapers.  However the concept applies equally to Banks and that post noted the dropping interest revenue at banks despite the rapid growth in assets.

Results 1998 to 2005 for the six big banks:

Loan growth: + 33%

Deposit growth: + 49%

Interest income growth: – 3%

Banks have survived by adding non interest revenue otherwise know as fees. These are tough numbers. Traditionally banks made money facilitating depositors and borrowers, yet that equation produced a drop in interest income over the seven year period.

Strategic question: what if non traditional competition can facilitate the deposit/ loan relationship without the fees?

Relevance to Bankwatch:

That strategic question remains valid 2 years later.  If bank revenue from interest spread remains flat year over year despite growth in assets, that suggests a business model problem.  I posted yesterday about the state of the economy and the reality of a smaller economy than todays.  What if banks must exist within an economy that suggests consumers will pay 50% of that which they will pay today?  Where are the dramatic cost structural changes to operate in that new revenue model?

More on this to come.

Written by Colin Henderson

December 21, 2008 at 04:30

Posted in Business Models, Canada, economy

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