Will Google exist in 2035?
Will banks be superfluous?
The advancing digitization will make banks superfluous in the next twenty years. If they fail to establish and defend secure and user-friendly platforms in the short term, they will soon cease to exist. An outlook on business models in financial services in 2035.
In search of the financial services of the future
The basic business model of banks has changed little in the last 200 to 300 years. Originally, private moneylenders who lent their own money and borrowers met directly. This model has been replaced by institutions that act as financial intermediaries. They no longer lend their own capital, but rather the money their customers have deposited with them. For more than 200 years, the essential business model of banks and savings banks has been the receipt of investor money on the liabilities side of the balance sheet and the passing on as loans on the assets side. In doing so, they perform various transformation services and in return receive an interest margin, i.e. the difference between the deposit and loan interest. This financial intermediation made sense for a long time and was very lucrative for the banks. However, by the end of the 20th century, a tendency towards disintermediation was already evident. The intermediary has increasingly been replaced through direct contact between lender and borrower in highly developed capital markets.
Digitization as a new competition for credit institutions
Since the beginning of the 21st century, in addition to the capital markets, there has been another powerful competition for credit institutions: digitization.
This digitalization, celebrated as the fourth industrial revolution, has a property that has never existed in human history: exponential growth. All previous developments have been linear and therefore predictable for human thinking. If a bank's profit has increased three percent in each of the last five years, it is likely that earnings can be expected to grow by about three percent in the coming year as well. This corresponds to linear thinking with incremental changes. Exponential changes are difficult for the human brain to process. The point is not to improve something by ten percent, for example, but to do it ten times better. It is not enough to iteratively optimize existing business models and processes; the model has to be rethought from scratch. This is one possible reason why credit institutions have so far not shone with innovation. For several hundred years they had a relatively secure, almost monopolistic business model that was not subject to any pressure to change, which has changed in recent years. The first small approaches can be recognized by FinTechs - young companies that cleverly combine financial services and technology.
Traditional banks still feel little threat from their small competitors. But exponential developments are slow at first and then very fast. Banks and savings banks are therefore well advised to use the small remaining time window if they still want to exist in 2035. The chances of this are slim due to the inertia of large companies and the banks' lack of innovative strength. Nevertheless, Microsoft founder Bill Gates is right when he said that banking services are necessary, but banks are not (“Banking is necessary, Banks are not”). Various estimates assume that, due to technological developments, around 50% of jobs at credit institutions will be lost by 2025, including the highly qualified.
Three main lines of business for banks
For the sake of simplicity, the three main business areas of banks are considered at this point:
- Payment transactions
- Investment business
- Lending business
In each of these business areas, FinTechs compete with the previous sole rulers and develop interesting and efficient models in the process.
Andreas Buschmeier holds a doctorate in economics and is a professor at the BA Fulda.
Payment transactions and the elimination of cash
A distinction is made here between cash payments and cashless payments. The young start-ups recognized the importance of online trading much earlier than the traditional banks and developed user-friendly and efficient payment methods. PayPal, which was founded in 1998, has a market share of around 20% in Germany and is widely accepted by retailers. The counter-model of the German banks, paydirekt, was only founded in 2014 and started after many disagreements among the banks and savings banks involved in 2016 with comparatively few acceptance points. If paydirekt does not offer outstanding user-friendliness and security, there is no reason to use this system instead of PayPal. In addition, with Apple Pay, Google Wallet and others, strong competitors have already established themselves in the USA and Facebook is also working on a payment system. The banks can no longer do anything against this overwhelming power; the battle is already lost.
Cash will no longer exist in 2035. The alliance of politics, central banks and business will push through the abolition of cash, even against the will of the population.
Alternative forms of currency, such as Bitcoin, will only be approved by states and central banks if they can continue to influence monetary policy and the money supply. However, the blockchain technology behind Bitcoin will prevail for various purposes in the coming years.
Big data is revolutionizing the investment business
Digitization and the associated possibility of analyzing huge amounts of data quickly and precisely (big data) will ensure that both investment advisors and analysts will no longer be necessary. Fully automated asset managers, so-called “robo advisors”, are already working very successfully. The human source of error, with all its psychological and sociological ballast, is completely eliminated. Banks only survive if they provide the dominant digital platform for investing.
Full automation in the lending business
For the credit business, as the flip side of the same coin, the statements on the investment business can be transferred. Risk assessment and pricing are automated, Big Data ensures a prediction of the probability of failure that borders on security. In 20 years' time, credit and corporate client advisors will be just as superfluous as the rating agencies that are still powerful today. In order to at least save their original business in the future, credit institutions have to force their small competitors from the crowdfunding sector out of the market with a safe, user-friendly alternative, e.g. with a shared digital platform.
Digital platforms could displace the banks
The next ten to twenty years will be determined by digital platforms. Traditional banks have little time left to jointly occupy one or more of these platforms and develop them into a monopoly. The probability that they not only overcome the inertia of their hierarchical structures, but also work together across all countries and legal forms, is negligible. Small, fast start-ups are likely to become dominant platform providers, replacing today's banks, due to the network effect and the associated tendency towards monopoly. But they too are being pushed out of the market by subsequent monopolists with better business models. And that only describes the horizontal progress - the expansion of the already existing platform model.
In addition, there is vertical progress, i.e. the complete reinvention of products and services that do not yet exist today, which is hardly predictable. In 2035, speech recognition and artificial intelligence will be so advanced that customers will no longer be able to distinguish whether they are communicating with a human or a machine. If it is still found necessary to “visit” a bank, thanks to virtual reality, you no longer have to get up from the sofa. These developments make the majority of bank employees and the banks themselves obsolete. Very few international institutes that establish secure and user-friendly platforms as a monopoly will survive the next 20 years.
Innovation makes additional developments possible
The developments shown appear possible with linear thinking. Disruptive, exponential innovations are not taken into account, because predicting an invention means making it. In addition, not all of the developments described are unreservedly desirable. A regulatory policy for cyberspace is urgently needed in order to prevent undesirable excesses that are detrimental to people. Politicians have to face this difficult task, even if the Internet knows no national borders and circumvents national laws if necessary. The regulation of financial service providers, questions of data protection and national laws were also not considered in this short article. International solutions must be found here.
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