The rest

Banks without assets

With companies like AirBnB, Über and Alibaba, among others, we've seen the rise of very asset-efficient business models in industries that have traditionally been asset-driven. The trend started with consumer services and is spreading to other industries, such as  construction, with companies like Fira taking the lead.

What about the asset business - namely banks?

Banks are defined by their assets. Their profitability is defined by their return on assets. Their size is defined by the amount of assets they own. Much of the industry's regulation is dedicated to banks' assets.

Will this still apply in the future?

To answer this, let's first look at what assets banks typically hold and what kind of innovation is taking place in the banking sector.

Typically, a bank's assets consist of cash, loans, deposits and other assets, with loans usually forming the biggest chunk of the asset side of the balance sheet. On the liabilities side, the biggest chunk usually comes from customer deposits. In other words, banks channel money they get from their customers as deposits to other customers as loans, with a higher margin.

What is digitalisation's impact?

Let's start with loans. Peer-to-peer loaning services are gaining popularity where people seeking financing look for lower interest and people with capital to invest look for higher interest than what banks can offer. Intermediating financing directly between those needing capital and those with extra capital can create signicant efficiencies, providing challenges for established financial institutions. It's already happening, with players like the Lending Club, which claims to be able to offer interest rates that are as much as 4% lower than those of traditional players - without sacrificing profitablity.  

Banks will still have deposits, which means they have access to cheap capital, especially via normal 0% interest rate bank accounts. This gives banks leverage in the business in the future - right?

As things stand right now, the main reason people deposit their salaries into banks and other established financial institutions is convenience - banks are more efficient and easy than dealing with cash. Banks offer people digital tools to pay bills, transfer money, invest, etc. Bitcoin and other digital or math-based currencies may change all this, allowing customers to store their money in digital form outside the banking infrastructure. They'll be able to to carry out payments and other transactions using math-based currencies directly to the recipient and store their money in their mobile phone, for example.

We may be facing a new situation where customers looking for financing and loans or a way to store their money move away from the bank ecosystem. It's nowhere near practical yet, but the first signs can already be seen. If this happens, will the foundation of the banks' assets, business and business model be disrupted? What is the business of banks in the future?

As Ûber, Airbnb and their like have shown, orchestrating the peer-to-peer network is a valid business. Banks need to move away from an asset-driven money arbitrage business into the business of orchestrating transactions.