As the rate of change in the banking industry accelerates, Holvi founder Kristoffer Lawson shares his thoughts on where there is room to innovate, how the customer experience should be improved, who will be disrupting the business models of big banks and how Holvi fits into all of this.
Commonly change in an industry is pushed by the swift slicing action of innovation, toppling giants who have suffered stagnation and who have wallowed in undeserved pride. Companies that get so caught up in their previous successes that there even exists a term to describe their difficulties: the innovator’s dilemma. As hundreds lie camping in makeshift huts and tents, demanding a stop to scandal after scandal, it is clear that banks have managed to avoid this normal pattern of competition and are, in fact, toppling of their own accord, under their very own weight.
This is a process that is not going to stop, no matter what bailouts are given. Banks will now have to innovate, acquire other innovators or, ever more likely, be heavily impacted by newcomers who are innovating. It is why there is such interest today in new banking. There’s a widespread sense of change rapidly approaching.
Most are not thinking big enough when it comes to innovations in banking
Change is upon us, but many are still looking at it from a very traditional position. The “I want to build a nicer bank” notion. The model that banks have been built on is the idea of accepting deposits and investing that money onwards, in particular in the form of loans. In that scenario the best bank customer is often one that has large sums of money which are sitting in one place — the passive customer. But for the majority of customers the function of a bank is the ability to store money, and make and receive payments efficiently. Other functions are superfluous to their daily needs.
Often at meetings where people have discussed new banks, I feel the focus of attention has been at the wrong end of the stick. People ask how can we do what banks do, but with more transparency and with more ethical investments? Really the question today should be: what are the new types of services we can build? How can we innovate through integration of social features, or supporting the community better? What could a better user interface look like? Are there different business models to deploy? That is how real progress can be made on a mass scale. Personally, I would rather do good in the world through building great new services, which allow new kinds of activities, than to be chained to what has been done before.
With Holvi we have ignored the traditional model completely, and focused on offering the core functionality of a utility bank for a particular type of customer segment, but without a heavy full credit institution license, and without the risk involved in investing customer funds onwards. With the approach we have taken our business model no longer needs to be tied to making investments from pots of money, but on innovating in other areas. For us the best customer is one who is constantly moving money in and out — the active customer.
New EU regulations are accelerating development
The Payment Service Directive is opening the doors to companies that are able to provide many of the services of a traditional bank, but with very new twists. This EU-wide regulation allows you to hold customer funds, make payments and receive payments (ie. exactly what many customers need) and to offer this service throughout the European economic area. This is made even simpler by the integrated euro currency zone, leading to payments across borders for the same price as local payments. It truly is fantastic. And all with capital requirements, and a regulatory process, that are an order of a magnitude less backbreaking than what a full banking license would require. In fact, if you are happy to experiment only within a single country, the capital requirement is a very nice zero.
Traditionally bank customers have been super sticky. The joke goes that you change your bank less frequently than your spouse. Really the reason for that is that the service offered is almost exactly the same, with minor differences in price and look & feel. Jumping from one to another does not offer significant new benefits or a significantly improved experience. It does not need to be that way. If we lose the baggage of working out how to acquire a full banking license, and unstick ourselves from that old business model, we can gain a freedom of thought which allows the building of services that are radically different. So different they will take traditional banks by surprise.
Disruptive new companies emerge across the financial services industry
It is not only payments and money-holding which is seeing completely new players. Loans are being delivered through p2p lending mechanisms, or from lenders like Wonga who are not lending customer funds out. Foreign exchange is being disrupted by new companies and models such as the p2p-based Transferwise. Investment opportunities are being offered by a multitude of online companies. Even cards can be issued and managed by third parties. All of these developments are cutting out banks from their traditional place at the heart of our monetary and economic system, resulting in a vastly more distributed and flexible network of companies. Banking for the Internet age.
We shouldn’t worry about banks dying. The next wave of financial services are already being built.
Image credit army.arch