Advice and Paper Pushing in Banking will be Killed by AI

For over 100 years employment has been shifting out of big industry and into services. Whether agriculture, fishing, mining or in the last 50 years manufacturing, as processes become automated, we’ve shifted to jobs where humans matter. But in a world where the ability of a human is surpassed by artificial intelligence, there is a real risk that many humans will lose their jobs.

Futurists are deeply divided on this future. Some claim it will be a new gilded age, with humans having more leisure time, working less and pursuing the arts and greater knowledge and learning like never before. Those with a negative view of the disruptive nature of Artificial Intelligence will argue that for the first time in 250 years we’ll see a net loss of employment as a result of technological advancement.

There’s only so many AI or robot ethicists and robot psychologists that we’ll need in the Augmented Age.

A recent study released by Oxford Martin School’s Programme on the Impacts of Future Technology entitled “The future of employment: how susceptible are jobs to computerization?” evaluated around 700 jobs, classifying them based on how likely they are to be computerized. The results were calculated with a common statistical modeling method. More than 700 jobs on a typical online career network were considered, as well as the skills and level of education required for each. These features were weighted according to how automatable they were, and according to the engineering obstacles currently preventing automation or computerization. The outcome was clear. In the United States alone more than 45 per cent of jobs could be automated within one to two decades. 

The study looks at various areas that AI will disrupt employment. Some of those areas are:

  • Perception and Manipulation Tasks
  • Creative Intelligence Tasks
  • Social Intelligence Tasks

So how will the Financial Services industry fare in this respect? Not good. It turns out that jobs where assistance of other humans is required, but doesn’t require a high degree of manual dexterity are doomed. Now, I know there’ll be a ton of people out there saying that, but what if I need advice on a complex investment product, or my first mortgage, but it turns out that the requirement for advice itself will be attacked by both AI and re-designing processes to support automation and designing in interaction and intelligence into product or service interactions.

This means that for jobs that currently are premised on ‘advice’ as a product or service differentiator in financial services are at extremely high probability of disruption. How high? We’re talking 96-99% probability. In statistics, that model defines the disruption of these jobs as pretty much a certainty.

Here are some of the FI jobs that fit the absolute ‘disruption’ criteria:

  1. Bank Teller
  2. Loan Officer
  3. Mortgage Broker
  4. Insurance Claims and Policy Processing Clerk
  5. Insurance Underwriters
  6. Claims Adjusters, Examiners and Investigators
  7. Bookkeeping, Accounting and Auditing Clerks
  8. Tax Preparers
Insurance Apps are already incorporating AI in claims processing

Insurance Apps are already incorporating AI in claims processing

 

Personal Financial Advisors don’t make this list, but the probability for that job to be automated is still around 60%. Meaning that more than half of the Financial Advisor jobs we see today are at risk. It turns out that good advisors with AI behind them can handle much greater scale of client management than those without, think going from 300 to 3,000 clients per advisor.

Anyway you slice and dice this data, AI is going to fundamentally transform the Financial Services sector, and advice from a human will quickly become a negative proposition from an economics and customer experience perspective.

If you aren’t redesigning your customer experience to extract human advice from the value chain, then you are already at a disadvantage against those who are. In a world where AIs are faster, more consistent, less prone to human biases and errors, a human advisor is just friction, slowing down revenue and relationship execution.

Build experiences businesses, not advisory platforms


Enough already with the "Branch of the Future"

Whether it is Bank of Queensland with their Hipster Branch launch, Citi’s famedApple-Store Branches, NAB’s Crowd concept, Unicredit “Branch of the Future” in Italy and Bulgaria, PNC’s Tellerless Branches, smaller regional players likeSouth Shore Bank and ConestogaBankWerx, or the launch of Video-Interactive Teller’s for TEB, Ion Bank, Banca Popolare and others, we seem to be hearing about new ‘Branches of the Future’ constantly. However, withdeclining branch activity across the board in developed markets, is the very term branch of the future part of the problem?

When BankWerx launched their new ‘branch of the future’ the press reported that they were offering free Wifi, phone charging stations and free coffee to engage prospective customers. Then these guys opened up next door…

 

 

There was an excellent recent talk by Jon Blakeney from i-AM Associates discussing how bank branches should be about todays customer, not the bank branch of the future. “No one has ever asked us to design the restaurant of the future” said Blakeney in his recent Next Bank keynote, and in that statement alone we identify one of the key hangups that banks have over changing distribution models.

With branches having been so central to the distribution model of banking in the past, it’s obvious that many banks will struggle to let go of this mode of revenue delivery, at least until such time that branches become clear loss leaders. Thus, for now there appears an inordinant amount of effort being put into ‘saving’ the old distribution models with a rethink, reboot or refresh – a future iteration that might restore the old behaviors of customers.

The problem is that the economics of branching is struggling as footfall declines (see Going, Going, Gone!), and while in some emerging markets branch traffic is still increasing on a net basis as the middle-class grows and large numbers of unbanked are becoming “banked”, the overall outlook for branch networks is still trending negative. Just as it has been on a net basis for most storefront retail of other easily digitized products such as books, music, movies, etc (see Celent data below).

The problem here for banks though, is one of focus. Branch activity largely is not declining because the branch is simply designed poorly, has too many tellers or teller stations, ordoesn’t have enough technology embedded – it is declining because customers just don’t need to visit branches like they used to. Banks should be cognizant of the fact that while refreshing branches will help with some segments of existing customers, and might reduce overall network cost, it’s not going to reverse consumer behavior trending away from branches.

The looming issue is new revenue. According to Javelin Strategy and Research, by 2015 Gen Y income will already exceed that of Baby Boomers. By 2020, their income is projected to exceed that of both Baby Boomers and Gen X. That’s just six years away. 78% of these Gen Yers cite Mobile Banking as the single most important factor for choosing a bank. But the problem for banks is simple – mobile doesn’t produce revenue. For leading banks they might generate 10-15% of their revenue via online today, but the bulk of revenue is still recognized in the branch (often incorrectly so).

How do we transition?

We’ve got all this real-estate, what do we do with it?

There are three key questions or issues on the changes impacting distribution methodology that continually come up:

  1. How do we get customers back in the branch?,
  2. What do we do with all this real-estate we’ve got, and
  3. We’ve got 5 year contracts with all these landlords, we just can’t unwind our presence that quickly

The first two questions often obfuscate strategy because the primary problem is not fit of the branch to the business, but how to fix under performing branch networks. The last becomes a business case issue – is it worth closing or downsizing a branch. Granted when most of those real estate contracts were signed there was a great deal more skepticism over the risk to branches.

However, the core metrics of branches need to be honestly assessed against the potential for future revenue. Those core metrics need to start with the simple measure of average number of annual visits per individual customer per year. This is the core measure of engagement that we often miss when looking at future branch potential on revenue.

Show me the money baby, not the friction!

The real trick, though, is providing a viable alternative revenue stream through mobile, tablet and web. For that we need a compliance leap – we need compliance on board with digital onboarding of customers, or at a minimum a reduced application/documentation workload for both new and existing customers.

A single view of the customer, and a progressive or tiered KYC approach. In a report issued in June of 2011, the Financial Action Task Force (the global AML standards body) suggested banks and FIs look at this as a solution for better AML compliance, lower costs and for improved financial inclusion. However, the tiered KYC approach also allows for better revenue delivery in real-time and via mobile.

Banks like Fidor are already using this progressive KYC strategy, allowing you to open an account via Facebook initially.

Remember, one of the core reasons we still prefer the branch as banks, is the preference by compliance teams for unique, signed application forms for each product application – this model must die. It simply does not fit with the future of revenue delivery.

Revenue delivery via mobile is inversely correlated with compliance friction. The more unnecessary friction I put in the process, the more unlikely it is that I will ever realistically compete with the branch in respect to revenue delivery.

Building the Bank of the Future

The Bank of the future is all about engagement and relevance. A branch of the future strategy is an effort to retain relevance, but it misses the key point that engagement in-branch is in decline for other reasons. Beyond a spike when a new branch layout is launched, I’ve not seen any data that shows signifcant improved engagement over time – you can bet if we were seeing this trend then the branch of the future enthusiasts would be yelling it from the rooftops.

Here’s the thing – I know we need new branch layouts that remove tellers. I know we need service points, and that they’ll likely be much smaller footprints, but replacing older larger branches so there’s no perceived drop in service. I know complex product revenue will still come through the branch. But we should be talking about building the bank of the future, and not just the branch of the future.

Within just a year the branch will be the least visited and least engaged channel in the channel mix for retail banks in the US, UK, Germany, France, Australia, etc. If your primary distribution or revenue strategy is improving the efficiency of your lowest performing, least engaged channel – then you’re doing it wrong.

I know many of you will argue that it’s still about revenue – that most of the revenue comes through the branch. How can we change that without investment in engagement outside of the branch? That’s the key problem with focusing on a branch of the future strategy – we avoid the real work that needs to be done. In doing so, we might just jeopardize the entire future of the bank.


Why smartphones will kill credit card rewards

Credit cards are expensive. According to BankRate.com the average US annual percentage rate (APR) charges on credit cards is 15.35%[1], but that’s down in recent years. During the financial crisis some US-based credit card APRs went as high as 39.6%[2] as banks like Bank of American tried to compensate for increasing risk, or unwind high-risk credit that was being carried by the bank. In the UK credit card rates hit a 13-year high in 2011, averaging out at 18.9% annually[3].

In some cases customers who had maintained a good credit rating, but were otherwise in the marginal zone of profitability, were targeted for perceived risk (re-adjusted due to the financial crisis) – this prompted some customers to creatively respond to these rate increases with very public rants against the banks involved.

[youtube]http://www.youtube.com/watch?v=jGC1mCS4OVo[/youtube]

The core problem with credit cards today for consumers is that they are fundamentally designed to encourage spending, in order to generate revenue for card companies and issuing banks. While debit cards are marginally better for consumers on an interest rate perspective, the lack of visibility on spend and overdraft fees means that in the US the average consumer pays $225.00 in fees per year[4] on a debit card/checking account – that includes all those “free” checking accounts, which are anything but!

According to CreditCards.com and TransUnion research from May this year, the average credit card debt per U.S. adult (excluding zero-balance cards and store cards) is $4,878, on the basis of average APR this means interest costs in one year alone would cost a consumer well over $600 – and that’s without paying down the card debt. Regardless of the construct, cards generally are expensive propositions for customers.

So if you are a bank or card issuer how do you convince customers to pay all those expensive fees, use the cards with greater frequency and increase the likelihood of expensive revolving credit?

The hook – rewards and cash back

The answer, of course, was card “reward” programs. The more you spend, the more free stuff you get, and even cash back on your purchases!

Reward programs can be traced back as far as the 1896 when Thomas Sperry and Shelly Hutchinson created a business that issued “S&H Green Stamps” (also known as Green Shield Stamps) which could be earned by consumers making purchases at participating supermarkets, department stores, gas stations, and retailers. During the 1960s, the S&H rewards catalog was the largest stand-alone publication (by distribution) in the United States, and it is said that S&H printed three times the number of stamps that the US Postal Service[5] at its peak.

 

This is what the first loyalty program looked like… (circa 1896)

In the 1970s Airlines jumped on board the ‘rewards’ concept with gusto. Wikipedia explains the history:

The very first modern frequent-flyer program was created in 1972 by Western Direct Marketing, for United Airlines. It gave plaques and promotional materials to members. In 1979 Texas International Airlines created the first frequent-flyer program that used mileage tracking to give ‘rewards’ to its passengers, while in 1980 Western Airlines created its Travel Bank, which ultimately became part of Delta Air Lines’ program upon their merger in 1987.
Wikipedia – Frequent-Flyer Program article

It wasn’t until almost two decades later that credit card issuers caught on to rewards as a stimulus, and even then it wasn’t a bank that first offered rewards with a credit card – it was AT&T. In 1986 AT&T launched their Universal Card Credit Card with “Thank You Rewards”[6], closely followed by Discover’s “cash back” program. Today over 60 percent of credit cards in the US are linked to reward programs[7].

The problem is that rewards programs are designed to encourage frequency. For airlines the purpose is to encourage you to fly. For credit and debit cards, they are designed to encourage you to spend, even when doing so carries a high cost. The economics of rewards programs are pretty simple – companies employing them wouldn’t use rewards unless these programs were highly successful in generating more than enough revenue to pay their way. While individual users of reward programs might gain some benefit, they are outliers. The rewards themselves are designed such that users of the card or airline pay a premium in return for marginal rewards, negating the benefit under cost-benefit analysis.

Even with reward propositions, a large percentage of consumers fail to redeem rewards on programs they sign up for. Clear Point Credit Counseling Solutions calculates that up to one third of consumers on credit cards fail to cash in their points annually.

“It’s actually a pretty wide spread problem, about a third of the people who have rewards points forget to cash out on them and it’s about an average of 205 dollars of [lost] savings for each consumer,” Rebecca Gershowitz, Clear Point Credit Counseling Solutions[8]

The real cost of loyalty and frequency

In the early 2000’s I did extensive work with Cathay Pacific and their Asia Miles program. Cathay was always trying to encourage the use of non-air miles redemption because it allowed the airline to run the program at lower costs, and they could trade off promotions and the purchase of miles to the merchants who offered their products into the Asia Miles catalog. This was always a challenge, because Asia Miles was their frequency program, and customers at that end of the spectrum were all about “fly free faster”. The most loyal Cathay Pacific customers, the Marco Polo Club members, were largely ambivalent when it came to miles/rewards, because for them it was all about recognition – getting the occasional upgrade, shorter queues, boarding faster, lounge access, etc.

Herein lies the problem. Those consumers that find the highest value in reward programs are generally at the lower end of the profitability scale, and while rewards might stimulate greater frequency (the jury is still out on that front[9]) – membership recognition is actually better at stimulating loyalty for the most profitable customers.

At the frequency end of the reward program, however, things generally work as long as there are enough program participants that don’t use their rewards, letting their points or miles lapse. This clearly is a challenge – Aité Group research in 2009[10] showed that profitability eludes most of the card reward programs already in operation. Research in 2013 coming out of Ryerson University in Ontario, Canada, suggests that customers’ satisfaction plays a significant role in profitability of loyalty programs, and that depending on overall customer satisfaction, it may be optimal not to offer rewards at all[11].

Enter Smartphone Loyalty

Smartphones have significantly lowered the friction in accessing and redeeming rewards, points or miles these days. While companies like Starbucks and some electronic retailers have used this to stimulate activity, the decrease in friction, and subsequent increase use or claiming of rewards spells trouble for credit card programs in particular.

Recent research from CloudZync, an e-Wallet technology provider, shows that the average customer now has access to six different loyalty schemes on their phone. While the CloudZync research focuses on the UK market, it shows that loyalty program usage has gone up across the board, and has significantly affected sectors like electronic retailers, supermarkets and clothing chains[12].

As smartphone usage increases rewards becomes easier and easier to redeem, there will be a decrease in the net number of customers who no longer claim rewards, and therefore marginal profitability will be hammered.

Lower redemption friction, translates to higher program costs

GenY’s also appear much more attuned to the notional opportunity cost of rewards built into credit card schemes in particular, where they are not convinced of the trade-off between higher interest rates, frequency of spend and the tangible value of the reward. Even for cash back offers, it doesn’t require much of a revolving balance over a couple of months for a consumer to wipe out any cash-back benefits.

Transparency on fees is much more of an issue today for consumers than those in the early 90s who were entering the credit card market. As modality of payments shift to the phone, card proxies will be more about payments utility, account or wallet feature set and overall ease of use, than the rewards that stimulate spending. In fact, it is likely that contextual use of a card proxie on the phone, including transparency on balance and real fees, will generate significant push back on any card program that attempts to stimulate spending at all.

In the era of the quantified self – the self-aware customer won’t make spending decisions based on cash-back, miles or trinkets offered – they’ll make spending decisions based on whether they can afford to make a purchase.

As we reach that point over the next 3-4 years, card programs will largely become a thing of the past, because I don’t care how you want to make me spend money – if I can’t afford it, I won’t spend it.

 


[1] Source: BankRate.com Oct 2013 – Variable APR (15.35%), Fixed APR (13.02%) http://www.bankrate.com/finance/credit-cards/rate-roundup.aspx

[3] Daily Mail, Feb 2011 – Credit card rates hit a 13-year high, leaving families squeezed by average interest of 18.9% – http://www.dailymail.co.uk/news/article-1352671/Credit-card-rates-hit-13-year-high-average-18-9.html#ixzz2jcTzKFAk

[4] Source: Consumer Finance Protection Bureau research as highlighted via CNNMoney June, 2013 – http://money.cnn.com/2013/06/11/pf/overdraft-fees/

[5] Source: Wikipedia Article – S&H Green Stamps

[8] Source: NBC News – “Unclaimed Reward Points

[10] Financial Services Rewards Programs: The Quest for Profitability (2009, Aite Group)

[11] Profitability of loyalty reward programs: An analytical investigation (A. Gandomi, S. Zolfaghar – August 2013)


In 5 Years, 50% of revenue will be digital

Where’s the revenue going to come from?

Mobile use is exploding in the banking scene. If you are a retail bank today in the developed world and you don’t have an app for your customers, you are increasingly becoming an exception. Certainly almost every bank in the world today has some form of Internet website and Internet banking capability. However, for most banks, the web and mobile are considered costs – platforms that certainly improve service levels, and lower costs of servicing customers, but that are a net cost to the business.

That’s ironic, because today we have entire businesses that have been built off of the back of revenue from web and, more recently, mobile. If you take the market cap of Alibaba (expected to be north of $150Bn at IPO next year), Amazon ($165Bn), Facebook ($125Bn) alone you already have more than half a trillion dollars in value that is generated by pure-play online commerce.

The disruptive nature of pure-play web retailers has been well documented, and now researchers are starting to quantify specific effects such as so-called Amazon “showrooming” where customers go to traditional retailers[1] to try a product, but buy it on Amazon for price. Modality shift of purchase, for example, the shift in music or book buying behavior, has been as equally disruptive from traditional business models and revenue. This year iTunes turned 10 years old, and in that time music sales in physical storefronts has plummeted by more than half[2]. In 2012 1.4 Billion digital singles were sold in the US alone, which is 7 times the number of CD’s sold in-store during the same period. If you are a record label and you don’t have a digital distribution plan, you’re screwed.

Showrooming has emerged as a threat to physical retailers business models

Most retail banking leads I talk to express that their primary concern is that total revenue will suffer, if either support for branch wanes from a consumer perspective or if the bank pulls back on branch budgets or investment. The reality is, however, that in most developed economies there is already clear data showing reduction across the board for branch activity whether it is transactions per month, average number of visits per customer per year, or indeed the most critical measure, revenue per product line. We now understand that for products like Mortgages or Account Opening[3], that web is a key driver for even branch revenue, accounting for 2/3rds of branch traffic for those products.

Most retail banks still overwhelmingly seek to drive to branch as a the default conversion measure for advertising and marketing activities. Married with compliance requirements that often still require in-branch IDV or KYC, and you have a ton of false positives for the remaining branch activities that still produce revenue.

What we know is that just like bookstores and music stores, once the instinct of opening a bank account switches from going to a branch, to downloading to your phone, the physical storefront experience is at threat. Which makes the need for web and mobile revenue absolutely critical for a retail bank.

Ok, so then why are banks historically really bad at delivering revenue online and via mobile?

The historical use of web

For the companies and organizations that published the first, early websites back in the early 90s[4] – the web was a publishing platform. However, by 1995 companies like PizzaHut.com and others were experimenting with what we started to call “Brochureware” – information on products and services that would drive sales. In 1995, many companies were starting to drive revenue via web, including the likes of Amazon.com, WH Smith, Tesco, Virgin Megastores, Interflora, Dixons, PC World and others. The web was now a fully fledged sales channel.

However, Retail Banks never quite saw the web that way in the early days. Primarily because you couldn’t sell bank products and services unless you were a bank, and there just weren’t that many pure-play Internet banks that were built independently of branch networks. So the primary use-case for the Internet became “Internet Banking” – basically a cheaper way to allow customers to transact and do day-to-day banking stuff, instead of requiring them to come into a branch or pick-up a phone. For most banks this was about “channel migration” or reducing the cost to serve customers.

This is why most bank websites in the 1995-2000 timeframe were essentially gateways to a login facility for access to ‘secure’ Internet banking. It is also why the IT team owned web at this stage of the platform’s evolution – because the primary requirement of web was functionality, transactional stability and security. Not revenue.

As bank marketers saw all these e-Commerce businesses growing they demanded access to the bank’s public website platforms to market the brand and sell specific products, but even in 2000, fully five years after Amazon had launched their online bookstore, banks were still only able to rustle up primitive product brochureware. Primarily this was a compliance and process problem. There was simply no way to accept a product application digitally via a web form. Many banks I worked with at this stage either printed out web forms and submitted them to the product teams who handled applications via the branch network, re-entered them in to the same systems the branch teams used, or simply asked customers to ‘fax’ the form to their branch. E-Commerce didn’t really exist for banks at the turn of the century.

When it comes to digital then, we’ve had the web grow up fractured. The public website was owned by marketers who could push messages and campaigns out via the website, but were heavily restricted in terms of what could actually be sold. The assumption was still you would read about a product online and then visit a branch to apply.

Whereas, the secure online banking website was owned by the IT guys who were there to ensure a stable and secure transactional banking experience, but were not measured on a revenue basis. So for the first 6 or 7 years of most Internet banking portals, revenue remained absent. In fact, for many banks today revenue is still absent from behind the login. Which is ironic, because up to 95% of day-to-day web traffic ends up clicking on the login button.

Banks are almost the only businesses that deal with digital this way today. Every other retail business, with the exception perhaps of some utility companies, see the main function of the web as delivering revenue. Banks have always fought this instinct based on the risk of cannibalizing their branch network or on the basis of compliance resistance.

Imagine if Amazon built their websites with the same approach as banks today, you’d have a website that would allow you to look at the entire book catalog, but when you wanted to buy a book would generally force you to visit a physical book store. For existing Amazon customers under this modality, the only real thing you could do online behind-the-login perhaps, would be look at the books you’ve previously bought. When you think about it this way, banks have really screwed up digital when it comes to revenue.

Airlines like Delta or British Airways now generate upwards of 80% of their revenue via digital today. In my opinion, that is what banks could be doing today if they simply enabled revenue digitally.

Solving the revenue problem

When it comes to revenue in the coming pro-digital channel era, no revenue is really bad revenue. It makes no sense to favor branch-derived revenue over revenue from mobile, web, tablet or other channels like an ATM, unless you are desperately trying to justify the ongoing existence of the branch itself. You might argue potential for fraud is a reason for physical IDV and in-branch bias towards revenue, but that still assumes that the identity thieves can’t compromise a physical identity and that the best channel for a customer will always be a branch.

By the end of this decade, just 7 years away, based on the decline in branch activity today, retail banks in the US, UK, Australia, Germany, France and Spain (to mention a few) are going to have to deliver at least half of their revenue via web, mobile and tablet to remain viable. For many banks their lateness to the party on this front means that they will have to outsource acquisition to partners that are already well connected with digital communities of target customers, and competent in positioning offers and products. This will actually serve to further increase the cost of acquisition for basic products from where it stands today, and further erode margin. Not good from an industry perspective.

For revenue to be delivered efficiently the silos will have to disappear. The compliance team will have to start working as consultants to the business to legally unlock revenue opportunities in real-time, or based on the needs of customers that emerge. The campaign marketers who have long battled to raise product awareness and kick that customer into the branch funnel, will find themselves with decreasing CPM effectiveness and decreasing budgets, those budgets having moved to more responsive product experiences or customer journeys.

The key skill sets in this new world will be the data scientists that understand when, why and how customers use bank products, and the storytellers that can place the product or service in the customer’s life when and where they need it. Not pull me into a branch, so I can jump through the risk process.

 


[1] See – Placed: Aisle to Amazon Study, February 2013.

[2] Music sales in-store declined from $11.8 Billion in 2003 to $7.1 Billion in 2012. However, inflation adjusted, that accounts for more than a 50% decline in physical music sales in the last 10 years – source: CNNMoney – http://money.cnn.com/2013/04/25/technology/itunes-music-decline/

[3] See – Web Shopping for Branch Sales, Novantis, August 2013

[4] See Wikipedia Article “List of Websites Founded before 1995


Two big predictions

Ron Shevlin (@rshevlin) and Jim Bruene (@netbanker) and I have been back and forth Ron’s article today on so-called NeoChecking Account and the news of the GoBank (http://www.gobank.com) launch here in the US Tuesday.

Firstly, let me just say that seeing the likes of GoBank enter the market is great news for consumers and once again proves the viability of the evolved category-killer bank. While GoBank has chosen to use their recently acquired banking license (see http://labusinessjournal.com/news/2011/dec/09/green-dot-completes-bank-acquisition/), their GreenDot prepaid product was originally launched in the “Program Manager” style they referenced in their press release yesterday. However, the back-office model that GreenDot uses to support their GoBank roll-out is not as critical as the distribution strategy of de-linking checking accounts from day-to-day banking accounts. While GreenDot’s stock is down 8% today (at the time of print – http://investing.money.msn.com/investments/stock-price?symbol=US:GDOT&) I believe that ultimately this strategy will pay off in spades for GreenDot.

This non-checking, debit account strategy is the same approach that Simple pioneered, and the same model as our friends at and Bluebird deploy. It bodes well for the new category of ‘bank account’ that is highly utilitarian and not fully-loaded without outdated checking costs or overdraft fees. A bank you can use day-to-day. For those that read my blog regularly you’ll know that I’ve been discussing this fundamental shift in distribution strategy for some time and whether you call it a “Near Bank” (as Dave Birch does) or a NeoChecking account as Ron Shevlin does, this marks a fundamental re-classification of the basic bank account. An account that is classified not by it’s underlying product structure, but by it’s utility.

That’s why at Movenbank we’re going even further. We believe the basic bank account of the future will not only not have checks (or cheques), but it will reside on your phone which operates as your primary payment device. Thus it will also not have plastic. I’m sure GreenDot/GoBank, Simple and Bluebird will come to the same conclusion and optimize their experience for mobile payments and feedback in the future, but for now that distinction of the mobile-first bank account hopefully will remain with Movenbank for some years.

So let’s get to those two predictions:

1. The last personal check in the US will be written sometime in 2018

2. Sometime in the next 24-48 months a stock analyst will downgrade a major bank stock for use of checking accounts and excess branch capacity

Here’s my logic.

US Check Decline is readily predictable

According to the Federal Reserve Bank (US) in 2000 16.9 Billion commercial checks were written annually. By 2010 that had reduced by an incredible 55% to just 7.7Bn checks annually. However, the early impact of P2P payments and mobile has already seen a further 33% reduction in check use down to a estimated 5.1Bn by the close of 2012. With the decline rapidly increasing in speed from a 9.6% drop in 2009, to a 23.9% drop in 2011, we can expect this only to speed up. On a simple trending basis then, the last commercial check to be written in the United States will be signed in either 2017 or if you are really optimistic in 2018. Unless consumer behavior reverts to 20th century norms and the check comes back into fashion – yeah sure…

Check use in the US is undergoing rapid decline

Thus the checking account is already dead, most banks and CUs just don’t know it already. So positioning a basic account without checks does not only make sense today, it should be your mainstream day-to-day account offering, especially for the Y-Gens coming to your brand.

Stock market analyst shift is inevitable

The biggest measure of a commercial bank stock with a dominant retail play remains both annual revenue, capital and loan book (ability to generate future revenue). What will become clear as the modality and acquisition of the basic bank account shifts (lower paper KYC hurdles, less friction, more online and mobile enablement) is that “account opening” and the ability of cross-sell/up-sell to lead to future revenue will be closely examined. At that point, lower friction engagement models and cheaper distribution strategies will be seen as better growth levers than traditional friction-heavy, branch processes. Any banks carrying excess stock where distribution processes could have already been moved to mobile, tablet or online engagement at much lower costs, will be penalized hard.

I predict that 2014 will be the year we see a financial analyst downgrade a major bank’s rating based on excess branch capacity for this reason.

It’s all connected by changing consumer behavior and engagement.

Whichever way you look at it, 2013 is a hell of a year for bank innovation.


Do you need a Banking License to do Banking?

Clearly, to be a deposit taking bank and offer products like Mortgages, loans, savings accounts and so forth, it would be easier to have a bank charter. However, today the lines between banks and non-banks offering financial services is blurring faster than speculative investors dumping shares for Facebook.

There are many types of ‘banks’ or organizations that use the word ‘bank’ to describe their business activities such as Photo Banks, Seed banks, Sperm Bank, DNA bank, Blood Bank. There are also organizations that use the word bank in their name for other reasons like the “Bank Restaurant” in Minneapolis, JoS. A. Bank Clothiers and others. JoS. A. Bank offers a Pre-paid Gift Card program for individuals and corporates that has the name “Bank” in it’s offering, but isn’t regulated by industry. Bank Freedom, from Irvine California, offers a pre-paid Mastercard Debit Card but isn’t regulated as a bank.

Despite some claims to the contrary, it isn’t actually illegal to call yourself a ‘bank’ or have ‘bank’ in a tradename. In some states in the US, you might have difficulty incorporating yourself as a “Bank” if you have bank in the name of your company and you’re intending on offering financial services. But then again CIticorp, JP Morgan Chase, HSBC and others don’t actually have “Bank” in their holding company name. You don’t need the name ‘bank’ in your name to be licensed as a bank, and having the name ‘bank’ doesn’t force you to be a chartered bank either.

Then there are the likes of iTunes, PayPal, Dwolla, Venmo, Walmart, Oyster card in the UK, Octopus in Hong Kong, and the myriad of telecoms companys who offer pre-paid contracts, who regularly take deposits without the requirement of a banking license. In some markets, this has resulted in a subsidiary ‘e-Money’ or basic deposit taking licensing structure, but these organizations do not have the restrictions, regulations or requirements faced by a chartered bank. For more than 7 million Americans, 11 million Chinese and many others, their basic day-to-day method of payment in the retail environment is a pre-paid Debit Card (sometimes called a “general purpose reloadable” card). The pre-paid market is expect to reach an incredible $791 billion in the US alone by 2014.

When a bank account is not offered by a bank
What’s the difference between a prep-paid debit card account in the US and a demand deposit account from a chartered bank? Both can be used online commerce and at the point-of-sale. Both can be used to withdraw cash from an ATM machine. Both allow cash deposits to be made at physical locations. Both can receive direct deposit payments like a salary payment from your employer. Often pre-paid debit cards can offer interest on savings also. So what can’t a pre-paid card do that a typical deposit account can?

Most prepaid cards don’t allow you to write cheques (or checks), deposit more than a few times a month, keep a balance in excess of $10,000, make transfers/payments that exceed $5,000 per day, and/or going into the red with an overdraft facility.

For many customers who use pre-paid debit cards, these are not restrictions at all – and thus the card represents an alternative to a typical bank account from a chartered bank. Behind the program managers of pre-paid cards there is an issuing bank with an FDIC license in the US, but the program manager is not regulated as a bank. That nuance may be lost on some, but for the customer they are generally completely unaware that there is a “bank” behind the card – they simply see the program manager as the ‘bank’ or the card as a ‘bank account’ based on the utility provided by the product.

Bank Freedom offers an alternative to a checking account, but is technically not a bank

Today PayPal, Dwolla, Venmo and others offer the ability to transfer money via P2P technologies that mimic the likes of the ACH and Giro networks. I think it is fair to say that no one considers these organizations to be ‘banks’, but until recently (certainly prior to the Internet) we would have considered the activity of these businesses to be “banking”. Now you could argue that PayPal is more like a WesternUnion than a Bank of America, but the point is that these organizations are increasingly attacking traditional ‘bank’ functionality.

Then you have P2P lenders who in the US have offered more than $1 billion in loans since 2006, despite not having banking licenses.

If only ‘banks’ did banking…
Today banking is not restricted to those with banking licenses. Banks no longer have an exclusive on the business of banking. If they did PayPal, iTunes, Dwolla, and the myriad of prepaid debit cards would be illegal. They are not. If they did, you couldn’t deposit money on your prepaid telephone contract without visiting a bank branch. If they did, you couldn’t send money to a friend without a bank BSB, sort code or routing number.

The assumption that only banks can do banking is a dangerous one, why? Because often, like any other industry suffering from competitive disruption, the only thing that forces positive change on an industry mired in regulation and tradition are competitive forces. Sometimes those forces result in the complete disruption of the industry (see Telegraph versus Telecoms), other times it results in fragmentation.

Are there banks who don’t have banking licenses? There are hundreds of organizations today that are doing banking activities that don’t have bank charters or licenses. Can they call themselves a bank? Some do, but they obviously don’t need to in order to offer banking-type products and services, and those that do generally have a regulated bank charter behind them through a partner. Like Post Offices around the world that offer a place to pay your bills or deposit money on behalf of a regulated bank, this activity is not illegal, nor does it require regulation. Why? Because the partner bank who has a charter is responsible for ensuring their agents and partners stay compliant within the legal framework

The activity of ‘banking’ is going to become a lot less defined, owned or identifiable in the next few years as many non-banks start infringing on the traditional activities of banking, and as banks are forced to collaborate more and more to get their products and services into the hands of consumers. While we still have banks doing the heavy lifting, much of the basic day-to-day activities of banking will become purely functional and will be measured by consumers on the utility of that functionality, rather than the underlying regulation of the company or institution that provides it. Thus, customers won’t really care if a bank is at the front end or what it’s called; just that they can get access to banking safely, conveniently and securely.

What will regulators have to say about this? Well that’s an entirely different matter.


The new banking distribution layer

There’s a great deal of discussion and debate around what will ultimately happen to banking as a result of the massive changes in connectivity, utility, mobility and customer experience taking place right now. One thing is for sure, the world is changing.

We see PayPal owning online payments, with others like Stripe hot on their tails.

Square is attempting to disrupt the POS and circumvent the existing payments rails by going cardless.

Simple and Movenbank are vying for the new definition of the ‘bank account’.

Telcos like Rogers applying for banking licenses, and ISIS pitching head-to-head with banks for mobile wallet dominance in North America.

We also see Facebook and Twitter becoming increasingly dominant channels for customer dialog.

New Disruptors Abound!

Intermediate or Disintermediate?

So will banks get disintermediated in all this? Well, yes and no. In economics,disintermediation is generally defined as the removal of intermediaries in a supply chain: “cutting out the middleman”. So there’s not too many middlemen in the typical retail banking distribution chain. To some extent in financial services this is already happening with the decline in stock brokers, insurance agents, etc in favor of direct. However, conversely, a bunch of newer aggregators and intermediaries are popping up as the interface to the bank or payments providers.

New intermediary plays in the last couple of years include Square, iTunes, Simple, Mint, and others. Probably the most interesting new intermediary to emerge in the last year or so is Google Wallet (or Google, or THE Google wallet – not like THE facebook though…). If you doubt the veracity of my statement, here’s proof – after just over 18 months of operation, Square supports 1/8th of all US merchants. They didn’t exist 2 years ago.

So we’re likely to see more variations on a theme in banking and payments, where new players are coming into the ecosystem and offering value beyond the traditional methods of distribution. In its purest form, this will be simply a challenge to the branch-led distribution model. How so? Ultimately, with mobile banking and payments, the branch and resultant paperwork processes becomes a convenience “penalty” for transactional and basic onboarding. This friction is a target for disruptors.

Disruption and Disenfranchising

The disruption that is occuring in the customer experience is all about removing friction in outmoded or outdated processes for customers. Whenever you tell a customer he needs to fill out manual paperwork, or visit a physical location today, you’re going to increasingly get kickback from a segment of the market. While many will argue passionately for the role of a face-to-face interaction and the “richness” of the branch experience, the reality is that there are two reasons why most customers will balk at that.

Firstly, they don’t have the time or they perceive it is faster to go an alternative route – convenience was always a key driver for disruptors like Amazon and iTunes. Secondly, we’re being trained that you can open pretty much any non-bank relationship completely digitally today – so KYC (Know-Your-Customer) issues aside, the push is for rapid digital onboarding of customers. In usability terms we call the later a design pattern and it ends up driving consumer’s expectations becuase it is a entrenced behavioral expectation.

Digital natives won’t be able to figure out why you can sign up for Facebook, iTunes, PayPal and other relationships completely electronically, but your bank still requires a signature. It defies logic for the modern consumer, and no amount of arguing regulation will overcome that basic expectation.

The end result of this is that banks being the slow, calculated and risk adverse organizations that they are, will likely allow disruptors the opportunity to come into the space between the bank and the consumer as a ‘friction’ eliminator.

Secondly, geo-location and contextuality of banking products and services, will mean a marketing and engagement layer that is built on either event or location triggers to recognize the need for a financial services product and the capability to stimulate an engagement or journey in real-time.

The mobile, wallet and tablet are all key components in this shift, as is social media and the cloud to some extent.

The outcome?

In the end banks will, for basic products, no longer exclusively own the end consumer. They’ll simply be the underpinning bank manufacturer that supplies the product to a new distribution channel or channel partner.

So will banks be disintermediated? Not really, but they will be disenfranchised, losing direct relationships with customers as banks adapt to becoming pervasive providers of bank products and services, when and where you need them. A split between the distribution and manufacturing of retail FI products will be the core outcome.

Banks can not possibly own the telcos, mobile operating systems, marketing companies, retailers, locations and other elements that will drive the delivery of banking products and services in the near future. This is where the customer will live – this is where they’ll engage. I won’t come to your branch, download your “App” or even visit your website to directly engage the bank if someone else can deliver me that product as I need it.


Why snail mail is dying, and taking your identity with it…

There has been a 25% decline in the total mail volume for the USPS (United States Postal Service) from 2006-2011, resulting in a $5.1 Billion loss in 2011 alone. Since 2007 the USPS has been unable to cover its annual budget, 80 percent of which goes to salaries and benefits. In contrast, 43 percent of FedEx’s (FDX) budget and 61 percent of United Parcel Service’s (UPS) pay go to employee-related expenses. The USPS has 571,566 full-time workers, making it the US’s second-largest civilian employer after Wal-Mart. It has 31,871 post offices, more than the combined domestic retail outlets of Wal-Mart, Starbucks, and McDonald’s. It’s also more than double the number of branches of the combined retail distribution points of Wells Fargo, Chase and Citibank. The problem is that 80% of those USPS offices lose money annually.

USPS’ Rapid Decline started in 2007 and has been shocking

Why the decline?

The decline in first-class mail in the US has accelerated in recent years. The USPS relies on first-class mail to fund most of its operations, but first-class mail volume is steadily declining—in 2005 it fell below junk mail for the first time. The USPS needs three pieces of junk mail to replace the profit of a vanished stamp-bearing letter.

Junk Mail, or as Advertisers call it “Direct Mail”, promotion is rapidly declining with projected declines in the range of 39-50% estimated for the period 2008-2013.

Email, Internet Bill Payment and Statements, SMS alerts, and other information delivery mechanisms are much more timely and cheaper than “Snail Mail” today. Environmental awareness and ‘do not mail’ lists have contributed to the decline also. The couponing business, which has supported the ‘junk mail’ industry for the past two decades in the US, has been decimated in recent times by the daily deals industry. Jeff Jarvis predicted this shift back in 2009.

It shouldn’t be a surprise that the USPS is in major trouble.

What does this have to do with banking and IDV?

At least 80% of non junk mail I receive these days is from financial institutions that I have a relationship with (an even then it is often bank ‘junk mail’). This is despite my best efforts to eliminate snail mail as a formal method of communication with those service providers I choose.

Most banks still ask me for my address, and require verification of that address through some utility bill. This is a requirement of most regulators too.

The problem is – no bank has ever, as far as I know, actually verified my address is real. In theory, a utility bill is one of the easiest documents to compromise via identity theft, and/or fake with photoshop and a laser printer.

Why do banks collect my address?

The initial reason had nothing to do with regulatory requirements. The main reason initially was to send me my replacement cheque book, or send my regular monthly statements. Today, with snail mail all but disappearing, why do I still need to verify my address with the bank? I actually don’t want the bank sending me snail mail, and my physical address has nothing to do with my ability to pay for credit or the likelihood of anti-money laundering.

From a compliance perspective, sending you physical mail is one of the riskiest activities a bank can undertake today, because not only is it not secure – it actually increases the likelihood of fraud. If there wasn’t a legacy snail mail process, it is unlikely in the extreme that compliance would approve a process as risky as snail mail today.

Do we need an address?

Today your address is just a common data element shared as part of your profile. It is insecure. It can be easily compromised. It bears no relevance to the likely risk or otherwise of your suitability as a customer. It is unverifiable.

It doesn’t make sense to have address verification associated with a customer from an identity perspective.

There must be a better way. Why not use the guarantor method? Why not get trusted associates to vouch for you, as they do with new social networks likeConnect. Why not ask a new applicant to get an existing customer of the bank to vouch that he is real, and trustworthy? Why not take a photograph of the applicant and match their picture to their drivers licence or passport photo using facial recognition, along with cross-checking a government database?

There are a dozens of activities I could undertake which are safer, more reliable and more verifiable than a physical address.

Identity doesn’t need an address. Identity is about verifying you are real, and an address doesn’t do that.

Keep it as a data point, by all means. But let’s stop kidding ourselves that an address is a requirement for KYC.


P2P gets its groove on!

No one could doubt that peer-to-peer lending (or P2P Lending) has landed big time in 2010, but it looks as if the best is just about to come.

The US leader Lending Club will issue more than $250 million in loans this year – greater than the last four years combined – for a total of nearly $450 million since inception.  Their last $100 million increment in their total loan portfolio growth came in just 4 months from the period July through November 2011.  Their returns have been stable throughout the market turmoil of the past few years – thanks in part to their focus on prime credit consumers – with an annualized default rate below 3%.

Prosper has seen 370% year-on-year growth in their business in 2011 lending over $70MM this year and bringing their total to more than $260m to-date , with a default rate of around 5.2%. Compared with BofA whose default on credit cards has been at an annualized basis of around 5.98% this year, down from a peak of 14.53% in August of 2009.

Zopa out of the UK has already lent more than £180 million (US$280m), which means they are now approaching a 2 per cent market share of the total UK retail lending market. The impressive thing about Zopa’s achievement is that their default rates are running at just 0.9%.

So who are lending from P2P lending networks?

If you believe the propaganda from the establishment, P2P lending is risky and only offers opportunistic financing to weak credit prospects – those that can’t get loans from traditional players. However, the reality is something entirely different.

The risk profile of P2P borrowers is often grossly overstated, and often the majority are healthy lenders simply looking for a better deal. That’s why P2P defaults are often as good as, if not better than, the majors.

“We can offer low rates in comparison to our banking competitors in part because we focus only on a select subset of customers — the most credit worthy borrowers — and our fair pricing is commensurate with their risk.”
Renaud Laplanche, CEO, Lending Club

The P2P lenders have also done considerable work on understanding the behavior of lenders, thus they don’t look just at the credit score (a lagging indicator of a default risk), but also at the future likelihood of a default.

“I think our low defaults aren’t just because of P2P but because we built a better credit model, taking more account of over-indebtedness and affordability than banks”
Giles Andrews, CEO, Zopa

These better models are helping P2P to thrive.

Tis’ the season for P2P Lending

There are times like Thanksgiving week in the US where P2P Lending is predictably slower than normal, but there are also times when P2P faces natural growth in demand.

“We’re gearing up for 50% increase in lending in January 2012, now that we’ve proven the viability of our business model.”
Giles Andrews, CEO, Zopa

I met with Scott Sanborn, the Chief Marketing Officer for Lending Club earlier in the year in San Francisco, but I got together with him via phone last week and asked him if there was seasonality to their lender’s behavior.

“We’ve always got a pop in January. Primarily because approximately two thirds of our loans historically are used to settle credit card debt.”
Scott Sanborn, CMO, Lending Club

Last week the Federal Reserve released its latest G19 report on consumer credit. Revolving consumer credit increased marginally (0.5%) for the first time in September of this year, and that trend has continued in October. Revolving credit card has been on the steady decline since 2008, down from a peak of $972Bn to a low of $790Bn in August of 2011. In 2009, that meant that every month saw a decline of close to $10Bn in revolving credit in the US. That trend has changed course in the second half of 2011 as borrowers return tentatively to credit facilities.

Revolving Credit has been on the decline since 2008, but this Christmas is set to rise again

Historically, December and January credit card debt always tends to shoot up due to Christmas shopping habits. Online lending around the end of the year has also been steadily increasing due to the primacy of the online channel, so it’s no surprise that as P2P awareness improves that P2P lending is set to rise this Christmas season too. The difference this Christmas, compared with the last 3 years, is that with revolving credit flattening out the spike in January is stacking up to be the biggest in P2P’s short history.

P2P – Maturing or Mature?

The other difference (in the US particularly) is that we’re seeing more sophisticated investors participating in P2P transactions, meaning that there will be an abundance of cash to support the demand for P2P credit. In fact, the major P2P players in the US are seeing institutional investors, high-net worth investors and the like looking to put cash into P2P. Not just to get a higher deposit rate, but to get that rate with only marginally greater risk – if at all.

Players like Zopa, Lending Club and Prosper are anticipating their largest January yet. In fact, this season is likely to be larger than the 2008-2010 lending seasons put together for the P2P market. If anyone had any remaining doubts about the viability of P2P lending, then I think we can put that to bed this season.

As the song goes… “It’s beginning to look a lot like Christmas!”


Transparency, Broken Risk and the Loss of Physicality

Recently I’ve been discussing with bankers, economists, strategists and futurists the future of the banking industry. At a time when we’ve got the likes of the “Occupation of Wall St” (#OWS) through to discussions in various camps about the very survival of banking as we know it, a question you might ask is how did we get here so quickly? 10 years ago, discussing the collapse of the modern day banking system and widespread loss of trust in bankers, might have been ludicrous, unthinkable – but today it is happening.

The New Normal is inherently unstable
As bankers most of us would have preferred if things had just stayed the same as they were, or at least returned to the ‘good ole days’ once the dust from the global financial crisis had settled. Instead we’re faced with talk of a “New Normal”, of increased volatility and of sustained uncertainty. There’s now a growing concern that a Greek default will trigger a crisis in the Eurozone, which in turn will bring on a new ‘great depression’. It is not lost on the public at large that this is a financial crisis we probably didn’t need to have. It is a financial crisis that was bought on by the ultimate in speculative investment behavior, the creation of financial instruments designed to create wealth and trading momentum from underlying, sub-prime debt that really should never have been readjusted as collateralized ‘AAA’ rated securities. So here we are today with so called blue-chip or developed economies which have higher volatility and risk, than so-called emerging markets. Since when did China and Brazil become better bets than the US as investments?

The perfect storm for a financial system in crisis is not just the failure of the banking system to self-regulate, or the default of sovereign nations in respect to servicing their national debt. The perfect storm is driven by three primary mechanisms that aren’t normally discussed as macro-economic factors, but are critical as part of a discussion around reforming the banking industry. They are:

1. Increased Transparency and Visibility
2. The Reassessment of the role of Risk and Regulation, and
3. The Loss of Physicality

Adjusting to a Transparent World
The response to bailouts, banker bonuses, new rates and fees structures, and to the financial crisis itself is indicative of the fact that bankers can no longer just assume that the public at large will trust that banks know what they are doing. How has the industry at large responded to this increased transparency? At first with incredulity, then with a defense of the indefensible, and finally with begrudging acceptance.

There are still many banks today, for example, who not only prohibit the use of social media in the bank workplace, but refuse to engage with end consumers in any really useful way through social media. In a world where dictators can be overturned, where public opinion is expressed in mentions, tweets, likes and fan pages, and where consumers can be as loud and effective as your most expensive marketing initiative – how do you adjust?

Understanding that you now answer to the public and you need to defend your positions with openness, logic and fair value, Brian Moynihan’s defense of BofA’s recent fee hikes shows a lack of nuance in this new, socially transparent world:

“I have an inherent duty as a CEO of a publicly owned company to get a return for my shareholders,” Moynihan said in an interview with CNBC’s Larry Kudlow at the Washington Ideas Forum… Customers and shareholders will “understand what we’re doing,”… “Understand we have a right to make a profit.”
Brian Moynihan, CEO – Bank of America

As a bank you do have the right to make a profit, but customers now understand more acutely than at anytime in history that they have rights too. It’s not that customers don’t want to pay for banking, it’s not that they are unreasonable; it’s that they now demand value and they are assessing that value, and exposing your shortcomings when you don’t meet up to their expectations.

In this way, what we need to do as an industry is better understand our value in the system. Right now we have trouble articulating that because we’ve become too historically focused on ‘banking’ as the system, rather than banking as a financial service to those that have the right to pay and choose. The balance has tipped in favor of the voice of the consumer.

There are bigger Risks than Risk
I was in a conference in Oslo earlier in the year and talking about the need for retail banks to adjust to serving their customers better, no matter when or where they needed banking, and a banker in the audience defended the need for a strict, traditional approach to physical KYC (Know-Your-Customer) because banking is first and foremost about ‘managing risk’ – at least that’s what he said. With our almost myopic focus as an industry on risk management and risk mitigation, we’ve perhaps missed the biggest risk of all – the fact that we are putting so much of the risk workload back onto the customer and the front-end of the business, that we’re starting to become a problem.

I’ve talked at length previously about the huge amount of time the front-end staff and customers spend in an attempt to reduce the potential legal or regulatory enforcement risk. When I, as a customer, am spending 50%, 60% or perhaps 90% longer doing a simple task like opening an account or applying for a loan than I did 20 years ago – do I see that as progress, or do I feel it a burden? Do I see such moves as a reduction of risk, or do I merely see it as an increase in complexity? In such a risk adverse environment, the bank is no longer serving the customer, the customer is serving the bank – and the customer is increasingly getting intimidated by the thought of having to navigate this complexity before he can get to the actual product or service he wants.

If you look at the biggest consumer shifts in the last 15-20 years, the biggest shifts have been driven around change in process or distribution that makes life simpler and easier. Here’s a few examples:

  • Mobile phone versus Landline
  • Google Search versus Catalog
  • Online Trading/Travel versus Broker/Agent
  • Multi-touch screen versus stylus/keyboard
  • iPad/Tablet versus PC
  • Kindle/eBook versus Paperbook
  • Online News/Streams versus Newspaper
  • Email/SMS/Facebook versus Mail/Telephone

The threat here is complexity, and invariably as we try to manage risk, we’re actually making customer facing processes more complex. This is bucking the trend of almost every other core customer interaction we’re seeing today.

The Loss of Physicality
I recently posted on American Banker | BankThink about my views around branches, checks/cheques and all things physical in banking. I suggest you read that separately, but a key consideration or thought in that article is as follows:

“The bank is no longer a place you go. Banking has becoming something you do. It is now contextual, and measured in terms of utility – how easily someone can use bank products or services to accomplish a task like shopping, traveling or buying a car or a home. The more a bank insists on physicality, the more it risks becoming irrelevant to customers who no longer cherish the traditional processes and artifacts. In just four years, that will be the vast majority of your customer base – not a marginal demographic, as some would prefer to believe.”

Conclusions
In this environment, retail banking is ripe for disruption. Why? Because instead of understanding the shifts around us, we’re digging in – levying fees, increasing complexity, and arguing that customers are just going to have to suck it up. After all, where else are they going to go?

Increasingly customers have a choice. Whether it is pre-paid debit cards, mobile wallets, PayPal, or other challenges to day to day financial interactions, the concept that as a regulated industry we’re protected from having to make the hard decisions and actually reform the way we work, is foolhardy.

We need to start working very differently…


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