Ask anyone what the business model of a bank is and they will tell you that they make money by lending money through loans, credit cards, mortgages etc. Ask a banker the same question, and they will probably say the same thing but may add a few technical terms like 'convertible arbitrage' that only they will understand. The problem with banking is that it was never meant to be that way. The product that banks were supposed to sell was 'Trust'...plain and simple. Everything else would be a by-product of 'Trust', but somewhere down the line, banks forgot this and ended up focusing on making money through the by-products, because it was easy money.
The problem now is that the very product that banks were supposed to sell is the one attribute that they are least associated with. Credit cards, everyone knows are evil... everyone knows that banks hide charges and interest through a multitude of clever methods. Banks no longer sell 'Trust' instead they sell expensive credit.... and the world is now paying the price.
Banks too are paying the price...though that is a subject that can be debated forever when you discuss who really fits the bill of a bailout. Consider banking in its simplest form that if a bank is genuinely to be trusted then surely they should be the first to tell their customers that they should manage their spending better and not offer credit limits that are less likely to be paid back based on lifestyle and income limitations. Customers might actually appreciate a bank that helped them to manage their money - hell, they might even be willing to pay for that kind of service.
Banking is due for a fundamental change... and if it does not change it will simply disappear and be replaced by organisations who are willing to provide the product of 'Trust'. Already we are seeing the birth of peer to peer lending which is already threatening the lending model that retail banking relies upon.
Already we are seeing the birth of a digital currency in Bitcoin, pre-paid services from companies that are not banks, and the birth of technology companies that simplify the payment process for goods and services like Google's Wallet.
In a recent survey of thousands of Apple customers, many said that they would be happy to have Apple as their primary bank. Have a guess why? Yes you got it...they TRUST Apple, the brand, the company, and the quality product and services it provides. Most people haven't figured it out yet, but they are already using the 'banking' services of companies like Apple and Sony. Ever bought an app for your iPad? You bought it with prepaid money on your iTunes account.
Sorry I'll say that again....you bought something with money from an account. Sound like a bank to you? You probably will even have come across an 'in-app' purchase for a game or app that was supposed to be free. Clever stuff....after all, how does someone get so rich catapulting silly birds into a building or slashing fruit with your finger as it flies across your screen, if the payment system wasn't so easy to use. Consider that if your electricity or phone bill popped up on your iTunes account, would you not feel comfortable paying it the same way? Ask anyone whose kids play games on the Sony play station network how easy it is to spend real money.
When I was a child, I traded football cards that I could hold and touch on the playground. My son however, buys FIFA 12 virtual football cards online and buys, sells and trades them for virtual 'Coins'. Sounds great until you realise that virtual coins come from real coins...which apparently I need to go and earn by working in the real world.
Hey presto.....make way for Bitcoin. A virtual currency on the Internet which threatens the very fabric of money, banking...and perhaps even the effectiveness of government. Imagine a currency solely under the control of the people. No government or fiscal policy can control it and you can move it, pay for something, or control it instantly from anywhere on the planet. Somewhere somebody is worried about it. If you were ever nervous about the value of the pound, euro, dollar or any currency for that matter....wouldn't you choose something like a Bitcoin to safeguard the value of your assets? It's safe, secure and available to you whenever you want....it provides the very services of Trust that banks were supposed to provide!
So if there is no need for banks to store your money, lend you money, or help you pay your bills then why do we still need them? Well the fact is that you don't need them - well not at least for those services, however they could be useful in providing you with Trusted Advisory services, and helping you to manage your money.
If they did that effectively, you might even use the p2p lending services of a bank, and you might even use them to manage your virtual currency, eWallet and payments. Banks would make their money on fees for trusted service, rather than on interest from a loan. To deliver on today's mobile enabled retail customer, banks should offer a range of trusted services like, personal finance management where they advise you throughout the month that you are sticking to your budget and send you alerts when you are over spending...kind of like a parent who tells their kids to spend their pocket money wisely.
How about offering customers a digital vault, where they can securely save their digital assets like photos, passport scans, Will, insurance documents etc. I know that I would be willing to pay a fee to someone who kept those safe for me...so long as I trusted them. If I had that degree of trust in my bank, I would even want them to access my Facebook, Twitter, LinkedIn, and Foursquare data to find out what I would like, particularly if I am standing nearby it, and offer me good advice, or better yet a discount.
They could even sell me insurance that is applicable to my lifestyle, because they would know all about my lifestyle. I want my bank to do more than just pay my electricity bill conveniently, I want them to analyze my consumption against all the other people in my area and tell me if I am energy efficient or not, or whether I am getting the best deal out of my provider....and if I am not then they should advise me on who the best provider is and help me change my account.
Now that is the basis of trust that can't be replaced and would make me loyal to my bank. Not loyalty points on a card.....but a trusted advisor who I could never dream of replacing because they keep my life in order. Imagine a world where banks keep their customers from getting into financial difficulty, and proactively give them trusted advice on how to get the most out of their money and life in general. Seems like a pipe dream now....but it isn't that difficult to do if you are sincere and have Trust as the one and only product you want to sell. If banks deliver that sort of trust....they might even end up being the heroes in a world where debt and financial crisis desperately needs a hero.