Imagine the following situations:
1) You go abroad and make purchases. In your bank statement the following month, you
see a poor exchange rate and a commission applied to the transactions.
2) You keep cash on your current account and are being paid a near 0% interest rate while you pay a regular current account fee.
3) You want to buy some stocks for your portfolio and are charged around €50 for the trade.
4) You want to open a savings account in another bank and need to assemble a mountain of paperwork to do so.
With the Internet, all these small charges are prompting you into the arms of Transferwise, Revolut or Robinhood.
The value proposition is clear (save on costs), the user experience is attractive (account opening is fast and paperless, everything is thought for mobile) and new services are being created regularly to digitalise old experience.
Today, it makes no sense to keep trading with your bank or not use one of these money transfer services.
Or does it really?
The way the traditional bank model helped people grow wealthier is the following: the bank accompanies them throughout various stages of my life and through its products and services, allowing them to grow their balance sheet.
What do I mean by growing their balance sheet? A balance sheet has 2 entries. Assets and liabilities. For most people, the bigger asset is their home. To fund assets, they generally used credit, which is a liability on their balance sheet.
If you have a well performing bank which works with you to grow your Balance Sheet, you will be regularly offered new credit lines (for a second home, for an investment property or to invest in other assets). The bank takes a low risk doing so because the advisor has an intimate knowledge of their situation and the local market. For that, they may pay a 1.8% mortgage rate when their best friend got 1.5% with their online broker. But their friend cannot get a second mortgage as they maxed out on the credit model of the new lender. Their advisor knows their situation and could get them another line of financing by talking to the branch director.
The counterparty is that the bank needs to earn an income. This was achieved through product charges and service fees. The 3% foreign-exchange charge on your foreign purchase or the €50 transaction fee on your stock purchase.
Nowadays though, there is a high transparency on fees and easy switching possibilities. Therefore, the 3% foreign-exchange charge is intolerable when one can pay 0.5% with a service like Transferwise.
It looks like it makes sense to assemble a portfolio of such low-cost services such as a digital bank account, a discount broker, an online mortgage adviser…
By doing so, we save on each transaction. However, we are no longer interesting for our old bank. We get an ever downgraded level of service: account managers that changes every year and are pressured to make their quotas. Remember your friends telling you: “don’t go to a bank, they will try to sell you something”?
The only interesting clients for banks are the High Net Worth Individuals, those with assets above €5m. These clients can generate large enough transactions to cover the cost of servicing them on the old model. In turn, the bank deploys all the products and services to help them grow their balance sheets.
As an apart, this could also explain the rising wealth inequality as only the wealthy can continue building their balance sheet aggressively.
In conclusion, to me, each party has yet to create the right business model.
Both sides can still take the lead to become the enabler of personal balance sheet building.
1) You go abroad and make purchases. In your bank statement the following month, you
see a poor exchange rate and a commission applied to the transactions.
2) You keep cash on your current account and are being paid a near 0% interest rate while you pay a regular current account fee.
3) You want to buy some stocks for your portfolio and are charged around €50 for the trade.
4) You want to open a savings account in another bank and need to assemble a mountain of paperwork to do so.
With the Internet, all these small charges are prompting you into the arms of Transferwise, Revolut or Robinhood.
The value proposition is clear (save on costs), the user experience is attractive (account opening is fast and paperless, everything is thought for mobile) and new services are being created regularly to digitalise old experience.
Today, it makes no sense to keep trading with your bank or not use one of these money transfer services.
Or does it really?
The way the traditional bank model helped people grow wealthier is the following: the bank accompanies them throughout various stages of my life and through its products and services, allowing them to grow their balance sheet.
What do I mean by growing their balance sheet? A balance sheet has 2 entries. Assets and liabilities. For most people, the bigger asset is their home. To fund assets, they generally used credit, which is a liability on their balance sheet.
If you have a well performing bank which works with you to grow your Balance Sheet, you will be regularly offered new credit lines (for a second home, for an investment property or to invest in other assets). The bank takes a low risk doing so because the advisor has an intimate knowledge of their situation and the local market. For that, they may pay a 1.8% mortgage rate when their best friend got 1.5% with their online broker. But their friend cannot get a second mortgage as they maxed out on the credit model of the new lender. Their advisor knows their situation and could get them another line of financing by talking to the branch director.
The counterparty is that the bank needs to earn an income. This was achieved through product charges and service fees. The 3% foreign-exchange charge on your foreign purchase or the €50 transaction fee on your stock purchase.
Nowadays though, there is a high transparency on fees and easy switching possibilities. Therefore, the 3% foreign-exchange charge is intolerable when one can pay 0.5% with a service like Transferwise.
It looks like it makes sense to assemble a portfolio of such low-cost services such as a digital bank account, a discount broker, an online mortgage adviser…
By doing so, we save on each transaction. However, we are no longer interesting for our old bank. We get an ever downgraded level of service: account managers that changes every year and are pressured to make their quotas. Remember your friends telling you: “don’t go to a bank, they will try to sell you something”?
The only interesting clients for banks are the High Net Worth Individuals, those with assets above €5m. These clients can generate large enough transactions to cover the cost of servicing them on the old model. In turn, the bank deploys all the products and services to help them grow their balance sheets.
As an apart, this could also explain the rising wealth inequality as only the wealthy can continue building their balance sheet aggressively.
In conclusion, to me, each party has yet to create the right business model.
- Fintech still need to create the kind of long-term relationship which will help build a personal balance sheet.
- Traditional banks need to educate their clients better so they are convinced they are sold a long term relationship and not just products.
Both sides can still take the lead to become the enabler of personal balance sheet building.
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