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 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, 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 –

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

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

Why Google, Apple and Facebook don't want to be banks…

Recent research has shown that banks spend more on IT than any other industry sector (See Deutsche Bank Research – IT in banks: What does it cost?). In fact, on average banks expend 7.3% of their budgets on technology, where other industries average half of that at 3.7%.

Bankers would defend these costs because of high compliance and regulatory costs, as well as legacy system support, security and fraud measures along with mission critical performance requirements.

“The reasons for a higher use of IT in the banking industry are manifold,” writes Mai. “Financial service firms have to fulfil exacting regulatory requirements which translate into IT costs that do not contribute to the firms’ earnings. Furthermore, banks rely heavily on IT in their back offices as well as their distribution channels”
Heike Mai – Deutsche Bank.
Source: Business Insider – Banks Spend Way More On Info Tech Than Any Other Business 

While that may be a reason for such high spend, in this day and age of transformation and innovation, it’s hardly an excuse.

Banking has long been considered one of the more profitable segments of the market, and big banks (these days called the TBTF crowd) have often been amongst the best or safest blue chip performers on the stock market. Since 2009 and the great recession, we’ve had to rethink that. Although many bank stocks have recovered quite well this year, of the 4 dominant banks in the US (BofA, JP Morgan Chase, Wells Fargo and Citi) their average Beta β is 1.935 making them extremely volatile historically. Comparatively the 4 dominant tech brands (Google, Apple, Microsoft, Oracle) have an average of just 0.983 – meaning they are as half as volatile as bank stocks. Amazon shares this characteristic with an Beta of 0.8. Admittedly Facebook doesn’t have enough operating history to provide a meaningful Beta right now, but it would probably be pretty volatile as well.

Can banks be as efficient as tech companies?

The key problem, however, is really productivity. Banks, while generally being quite profitable businesses at the top end of the market, are increasingly becoming less efficient at delivering revenue. This is undoubtedly due to increased regulation, tons of outdated and legacy process and distribution bias, and historical organization structure.

Let me illustrate.

If we use the same group of companies above to compare relative performance, the tech industry has been performing very well from a profitability perspective these last few years. Apple alone generated close to $41.7Bn in profit last year, which is essentially the same as BofA, Wells and Chase combined with $43.6Bn. The 4 top banks generated $51Bn in profit for 2012, whereas the big 4 tech giants generated $85.2Bn in profits for the same period. While that looks on the face of it like a decent performance by the banks coming off a tough few years, the reality is that the effort it actually took to deliver that revenue is comparatively poor.

Despite a bigger IT spend than any other industry sector, the revenue or profits generated per employee are telling.

Bank of America, JP Morgan Chase, Wells Fargo and Citi between them employee 1.051 Million people to deliver that $51Bn in profitability, or roughly $48,517 per employee.

Google, Apple Computer, Microsoft and Oracle have between them 341,777 employees that delivered $85.2Bn in profitability in 2012, or roughly $249.285 per employee. More than five times the margin than their Tech equivalents.

Growth has slowed for the big banks too.

This all begs the question as to the long-term viability of the current model.

Would Google, Facebook or Apple be better at banking?

While many have pondered the question as to whether FB, GOOG or AAPL might make better banks, I think the question is more likely how is this disparity going to evidence itself in future business models.

Right now we see a plethora of start-ups in the payments space, and we see the likes of Moven, Simple, GoBank, and Bluebird taking on the question of alternative distribution. The prepaid cards industry in the US has been growing at a CAGR of 16% according to Visa’s research, which compared with the decline in checking accounts in the US at -2 to 4% CAGR over the last few years, is instructive in this regard as well.

The fact is that the fastest growing deposit product in the US has been prepaid debit cards, and this have been delivered with a much lower distribution cost (although cost of acquisition remains high). The potential for disruptive distribution plays is certainly evident.

However, Google, Facebook and Apple are unlikely to want to be banks with the sort of capital, compliance and regulatory overhead associated with the banking business. Having said that, Apple should probably get it’s own bank license in the Caymans just to hold their huge wad of cash reserves right now. I’m sure that would somehow make sense. The more likely outcome is actually that Google, Facebook and Apple are part of the solution for lowering distribution costs for banks, and they’ll likely be able to charge a premium for that access in the future. Especially as banks realize that customers aren’t opening new accounts in-branch and they start scrambling for new ways to acquire.

What can banks learn?

The key message is clear. The legacy transactional banking and distribution infrastructure, supported by outdated metrics, budgeting, processes and organization charts has over time, built up into an unsustainable operating model. While regulatory imperative has significantly increased operational costs, we’ve ended up simply adding complexity and inefficiency on top of the old system, rather than rebuilding the underlying bank and its processes.

It’s really, really tough to replicate the compliance and transactional processing capability of a bank today. That’s why the cost is prohibitive. It’s also why Google, Facebook and Apple don’t want to get into the business of banking. However, they’re going to increasingly be in the business of selling banking products, apps and services to consumers (in an effort to maintain acquisition traction), and they’re going to be looking at owning more and more of the payment instance (before, during and after a transaction) because of the opportunity for high-frequency, low-margin revenue and advertising.

Banks are going to have to take a hard look at friction in the front-end, because that is where the inefficiencies of the model will result in loss of share of wallet, the end of the concept of the primary financial institution (replaced by the primary financial application), and other such tectonic shifts. As a bank it’s not about spending more money on IT, or becoming an IT company – it’s about lowering core operating costs through consolidation of legacy platforms, lowering distribution costs and seeking revenue through new channels. But mostly it is about getting rid of the friction at the front-end.



Branches have a strong future as alternative channels

Back in 2008 I started talking about the BANK 2.0 concept and the consumer behavior shift that would result in the bulk of customers in developed economies abandoning branches over the coming decade. The pushback to this concept was fervent with most bankers calling it a ludicrous suggestion, others being not so kind. In 2011 when I wrote my second book BRANCH TODAY GONE TOMORROW I tried to quantify this shift in terms of branch closures in the US market and calculated that between 30-40% of all US branches would close in the coming decade. 

Two recent research pieces, although not the first to highlight changing branch behavior, have started to quantify the speed of this change. The first, a report from Celent, was released this April and based on transactional activity estimates a 30-40% decline in US branches over the next decade. The second, a teller line series from FMSI tracks the rapid change in transactional activity and the decline in teller utilization down some 45.3% since 1992, or more importantly down 28% since just 2007. FMSI has been doing this teller line series for 20 years, and the change is as much as about the decline since 92 as the statistics that show a fairly clear indication of over-branching based on per capita data.

What reduction in transaction activity means

The primary reason in-branch transactional activity is declining is simply that retail consumers no longer need to visit branches for much of their day-to-day banking activity. The popularity of internet banking from the early noughties and the rapidly climbing popularity of smartphone based banking has shifted the epicenter of day-to-day banking. When customers don’t visit a branch as much, then we see a resultant decline not only in transactional activity, but cross-sell, up-sell and general revenue sourced through the branch.

We’re going to see a lot more of these in the next few years

While there is often the passionate assertion by bankers that while customers might stop visiting the branch for transactions, they’ll still come back to buy and seek advice, the data is showing a firm correlation between declines in transactional activity and specific product revenue. Once retail banks get better at sourcing revenue online and through mobile, then the current friction which often insists customers present themselves in the branch to execute revenue, will further dissipate, further reducing the need to frequently visit a bank space.

Overall, however, the dynamic in branch banking is shifting in the short-term very quickly. The traditional transactional banking support structure that is transaction heavy, has no place in the future branch space which has become largely transaction-less. While small businesses who rely on cash will still require a place to deposit cash, the majority of cheque deposits, wire transfers and such will vanish from the branch space. So what will customers who visit the branch be doing there?

There will be two primary reasons for a visit to the branch in the future. The first will be to seek advice on a complex product or a product configuration, where it will be just simpler to engage with someone face-to-face, although as customer experience and interaction design improves many product onboarding processes will become simpler and easier to navigate through digital channels. The second will be that I have a sticky problem as a customer that I simply haven’t been able to resolve myself as a customer through digital or the call centre.

It simply means that when I visit the branch in 2018, you had better have your very best staff on the job and ensure that you solve my problem on that first visit with a high level of competency. Upskilling existing teller staff may not work to bridge the skill gap here – you need a very competent service person, more like a concierge at a Four Seasons hotel than a current teller.

The branch as an alternative channel

The good news is that while there will be a reduction in branch traffic and branch revenue that results in a reduction in branch economics and results in mass closures of branches, still a good half of the existing branch network will remain. The branches of the future will be somewhat based on a hub and spoke approach with the flagship store in the primary geographies, surrounded by satellite support branches that are more like a small service center or a specific use-case sales center (e.g. a pop-up mortgage specialist branch near a large property development). This will result in a shrinking of square footage allocated to the total branch network over time also. But many branches will remain.

There are still a large enough segment of customers, centered on baby boomers, who are quite comfortable using the branch today that are unlikely to dramatically change their behavior. While this shrinking demographic will represent only a very small fraction of the customer base by the end of the decade, many of them are asset rich and therefore make a good business case for ongoing branch support.

For new customers, there will still be a significant percentage (less than half) who are either taken into a branch by their parents, or who choose to open an account in a branch themselves. Like Apple store aficionados, while they’ll get their account (iPad equivalent) at a branch, they’ll not generally come back to the branch for their other products (think Apps). It’s tough to argue for increasing branch budgets when many Gen-Y customers may only visit a bank branch two or three times in their entire life, but there will be enough of this account opening demand that certain brands will be able to sustain smaller branch networks based on this initial customer activity trend.


PTP FTW! The beginnings of something much greater…

I had a call with an industry colleague earlier today talking the recent news on GMail Google Wallet integration, Dwolla’s funding round and the “Square Cash” announcement. At large I’m seeing two broad industry responses to these moves.

The first, is to see this all as a distraction from mainstream banking and that essentially all these new players are just competing between themselves for marginal business, here’s a few notable examples:

Alternately, you have Google, Square and Paypal taking aim not at each other, but at an industry mired in friction, process, and rules and regulations that appear to make a very simple task like sending money from Person A to Person or Business B, a lot harder than it would appear to be. This very friction, is for many in the industry, the reason why they think new P2P processors won’t ever compete with the industry at large – quite simply, the barrier to entry and the workload and overhead from a regulatory/reporting/risk perspective means new players will always have to defer to the existing rails, particularly when you have to cash-in and cash-out.

I’ll give you a hint… Square is not competing with PayPal

Here is an interesting dialog on Y-Combinator’s Hacker News which refers to this conundrum –

Dwolla’s take on their service is very different to this – Dwolla are positioning themselves as a true alternative not only to ACH, but also to the merchant rails provided by Visa and Mastercard. In my recent interview with Ben Milne from Dwolla on Breaking Bank$, he made the following insightful comment on their role in the payments ecosystem:

“…because the internet is always available you should be able to access your money and exchange it with anyone else, and because all that money is essentially tracked as data, it shouldn’t really be that expensive to exchange. What we ended up realizing was, that in order to do that we had to create an end-to-end solution. As the company started scaling up on the volume side we started to realize some of the limitations to ACH and things like that. So, one – our early kind of philosophy was ‘we just want to solve this simple problem’ and I don’t think I realized exactly how big it actually was. To solve the problem we had to come up with an end-to-end solution that not only allowed us to communicate with financial institutions, but directly with consumers, developers and merchants… what we were left with is a solution that communicates directly with the financial institution core, right down to the end consumer.”
– Ben Milne, Founder of Dwolla, Breaking Bank$ Radio Show, May 9th, 2013

The issue perhaps is one of philosophy. Banks are trying to reinforce the existing rails for two very simple reasons:

  1. They perceive existing rails as “less risky”, and
  2. They make money off the existing rails and the surrounding friction/complexity, and don’t want new entrants displacing that very large, but still essentially closed-loop mechanism (i.e. you need a banking license to be a part of the ‘club’)

So you have two competing goals here. One is simplification of the mechanism of sending money, and in doing so it is creating new closed-loop systems, but systems that are far more user friendly, offer lower or equivalent costs (both on fee and time) for consumers, and also are technically far more open and capable from a platform perspective. When was the last time your bank let you GMail your employees their salary? Ok, we’re not there yet, but the day is coming.

While the bank SWIFT and ACH networks, and Visa/Mastercard/Amex/Discover rails are certainly massively dominant, by far the fastest growing payments modalities right now are the likes of PayPal, Square, Google and Dwolla. These players aren’t competing against each other, they are solving the friction problem in moving money from one person to another. But here’s the kicker…

Once enough people join the closed loop system of a PayPal, Google, Square or Dwolla, then the only remaining issue is getting cash in and out of that system. This is where proponents of the current system breath a huge collective sigh of relief. They’ll point to the news around BitCoin’s and Mt. Gox recent run in with the Fed around unregulated movements of cash, as Governments clearly want to monitor and regulate cash going in and out of the system due to concerns on money laundering, and the banks are the only players in town that have the license to do that right? Well, technical money transmitter licenses also allow non-bank players in this space.

The challenge is this – once enough people are using alternative P2P payment networks or mechanisms, then the utility of that system goes through the roof. Metcalfe’s law is one of those nice little laws that govern the growth of closed loop systems that turn into these highly scalable networks, but probably Reed’s law governing social network growth is more applicable. The beauty of a independent payments network can easily be shown by the success of PayPal and more recently iTunes and even Starbucks…

With 128 million active accounts in 193 markets and 25 currencies around the world, PayPal enables global commerce, processing more than 7.6 million payments every day. Because PayPal helps people transact anytime, anywhere and in any way, the company is a driving force behind the growth of mobile commerce and expects to process $20 billion in mobile payments in 2013
PayPal Media 

While the banking industry might like to categorize these P2P initiatives as hemmed in by regulations, or limited in impact, the implications are far more reaching. Since the arrival of the internet we have seen an explosion of alternative payment schemes. While initially on top of the existing rails, these closed loop systems are now creating behavior that is far more efficient than the incumbent systems they’ve replaced, and are connecting payers and payees in whole new ways. Inject context, rich overlay, merchant deals and offers, interchange fee pushback, mobile modality, social context of payments (e.g. splitting a bill at a restaurant), etc then the current ACH network and card network rails just aren’t robust enough to adapt.

P2P is the start of a whole slew of alternative payment modalities and use cases. Payment modalities that are being created by users on the move, and by networks that are much lower friction than the incumbent networks. The only thing stopping this from cutting out the back-end players, is volume and the cash-in/cash-out problem. Once you have enough utility in the network, however, as we have seen with the likes of M-PESA in Kenya, then the incumbents have to play by new rules or else they are simply circumvented.

Utility will trump the old rules. P2P is just the beginning and I’ll let you in on a little secret … they’re not competing with each other.

The death of branches probably started in 2010

There’s a strong statistical argument to be made for disruptive technologies that change consumer behavior. I’ve argued the impact of this on branch banking extensively starting with Branch Today, Gone Tomorrow, and more recently in Chapter 3 of BANK 3.0, but I’m still faced with significant resistance in the retail banking industry at large. While there is growing evidence for a grass roots change in bank behavior, it’s not uncommon to see quotes or responses like this still in the banking sector:

Ten years ago the consultants said to us that we had to scrap our branches and go straight to the internet, but I had heard those kinds of statements before with the credit cards and ATMs…I’m old enough to remember.”
Alfredo Sáenz, CEO Santander (The Economist, May 19th, 2012)

I think that this sort of comment is effectively hiding your head in the sand, ignoring the signs. Thus, I thought I’d share a statistical view of the triggers that result in the deconstruction of traditional distribution systems, and look at the evidence we can already see in the retail banking space to give some specific metrics around which branches need to go and when. This is hard data demonstrated in a way that reinforces that banking is no different to any other business facing changing consumer behavior. If you still believe branches will survive en masse, you need to at least read this for your own peace of mind.

One other warning. This is a lengthy, detailed post for obvious reasons…

Core behavioral shift

The argument at the core of anticipating widespread disruption to the physical distribution channel within retail banking is to examine changing behavior around the branch, and if there are any patterns we can learn from in other industries. In industries like music, books, video rental, and others we see historically the same triggers and shifts, along with the same reluctance to accept the inevitable changes that this brings. In each industry we’ve seen majors like Tower Records, Borders, and Blockbuster (see Wikipedia’s List of Defunct Retailers of the United States to see the full effect of disruption in distribution) faced with the same core shift, and an inability or unwillingness to change their distribution model to match changing consumer behaviors. In the retail banking market, we’re seeing the same reluctance to believe that anything will be fundamentally different with passionate arguments that the ‘branch will survive’. What is typically at the core of this imperative for change?

In each disrupted business or industry we see a paradigm shift in distribution initiated by a technological breakthrough that changes buying habits. These paradigm shifts are sometime convergent as in the case of the iPod and iTunes, but correlate with a core product model such as the shift from buying entire Albums, to just buying (or downloading) Singles. In the case of books the core buying behavior is characterized as eBook versus Hardcover or Paperback, but the eBook wasn’t really a serious competitor in the buying behavior stakes until Amazon launched the Kindle ‘eBook reader’.

At the core is an emerging behavior that demonstrates a trade-off between buying convenience and the need to ‘touch and feel’ the brand or product in-store. Often the new product provides a substantial price benefit because of lower distribution costs also, but not always. Great new product mechanisms show that convenience and ease of use will often even trump pricing disadvantages (such as in the case of a booking fee for cinema tickets).

In each instance of buying behavior shift we see early adopters first out of the gate on the new technologies that allow different buying or consumption, we then see both traditional consumers and retailers voice extreme skepticism around the import of this new emerging behavior, and finally we see rapid adoption of the technology over 3-5 years resulting in a irreversible upheaval of traditional distribution systems. This cycle of adoption and industry realization might be likened to the Kübler-Ross model, commonly known as the “Five Stages of Grief”, the only difference being that by the time the industry at large accepts the core consumer behavior shift a few major brand names have usually, already gone the way of the Dodo.

Those that have gone before us

The cycle of disruption can be articulated in the following simple manner. We start with Physical Products in a Physical Store supporting the traditional distribution structure. A new distribution platform (such as the Internet) comes along and changes early adopter buying behavior – we still buy a Physical Product but it comes through a Digital Store. Finally, the product (where possible), is abstracted to a digital form (Digital Product) which is Digitally Distributed without the need for the traditional stores.

Physical Product-Physical Store -> Physical Product-Digital Store -> Digital Product – Destroys Physical Distribution

To support this process we need both changing consumer behavior, and the paradigm shift of an emergent digital product. While Amazon has disrupted book sales massively through the Kindle, they can’t affect the same rapid level of disruption on clothes, shoes and electronic goods because those products can’t be fully digitized. When you digitize the product, it eliminates the majority of physical stores required for distribution over time because consumer behavior shifts away from visiting the physical store as the primary buying behavior. Whereas, when a physical product is retained, there is more of a split along buying preferences (e.g. in-store versus digital store) and the same shift takes longer or levels out.

The Typical Pattern of “Store” Disruption


The other interesting side effect of the disruption cycle is that in industries where the physical distribution layer is destroyed, incumbents rarely survive as the dominant distribution players. Look at books where the likes of Borders and Angus & Robertson failed in the last two years, Barnes & Noble still struggles to survive and Amazon absolutely dominates hardcover, paperback and eBook sales across the United States (and to some extent globally). Amazon is now the largest distribution player in book sales bar none – because they owned the new emerging distribution platform, i.e. the digital book and reader combined with the digital bookstore.

Continued on Page 2….

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 ( 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, 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 – 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.

Banks can’t compete with digital for advice

There’s a long held premise that branches are great channels for advice, that this is the one differentiation that bank branches provide that the Internets could never compete with. There are three problems with this assertion that should rightly challenge the superiority of the branch channel in bank operations today:

Customers rarely get advice in a branch

The average customer walks into a branch to get a task completed. Whether that task is cashing a cheque, wiring funds overseas, looking at refinancing on their home or applying for a credit card, that task is generally the purpose and focus of a visit to a branch. When a customer comes in focused on a task, then they are not of the mindset where they are generally willing to hear unsolicited “advice” from the teller or banker, because they want to get in, execute and get out.

Qualitatively when you research customer interactions in-branch and ask customers when the last time they received ‘advice’ in their bank branch, most can’t ever remember receiving any sort of advice in the branch space.

Check out this YouTube video with customer comments to that effect


This is counter-intuitive for branch bankers who believe that this is what customers are getting in-branch. However, the metrics for the bank officer are to try to upsell or cross-sell a customer who comes in for a basic transactional interaction, they are not to give unsolicited advice to help a customer with their money or financial health. In that respect, customers are very clear about advice that is caged or camouflaged as a cross-sell proposition – to them it’s an attempt at a sale, not advice.

What a banker might call advice – the cross-sell and upsell – is not advice from a customer perspective. True, unsolicited advice that helps the customer without expectation of revenue is very rare in the branch space because there is simply no metric in the system that allows for this.

The advisor no longer benefits from information scarcity

The concept of advice in-branch is predicated on the principle of information scarcity. The branch officer will know something about banking or financial services that a customer won’t – he’s an expert. However, even in the private banking space today, where advisory requires the ability to juggle multiple asset classes, thousands of potential products, the pendulum is swinging toward more informed customers who are challenging the advisor.

Take a scenario where you have a 2nd generation private banking client interested in the energy sector and green energy. The client comes into the bank to meet with their private banker to discuss this emerging industry and look at investment opportunities. They’ve indicated interest in this area for some time and have subsequently spent the last 3-4 weeks researching the field and options, so when they come into the review meeting with the relationship manager, they’re extremely well informed.

This is the way we used to give advice…

The private banker launches into a discussion on a selection of appropriate funds or structured product options across asset classes, which capture the bank-led approach to the field of green technologies and investments. But the client has come up with something left of field. They’ve found that investments in solar silica (the refined quartz product use in the production of solar cells) and geothermal technology is underleveraged and offer significant opportunities.

The private banker has never even heard of solar silica. So he brings in the commodities specialist – who likewise has never heard of solar silica. There is no specific geo-thermal product, but some ETFs that have a slice of geo-thermal investments.

At this stage, the client has become the advisor. While the private banker can help with execution, they are forced to now go and research the options and assist the client with their buying decision, rather than advising them on an asset class or a product.

This type of interaction is increasingly common, and it turns the head on the old advice model. With 5-Exabytes of content created every two days the likelihood that an advisor will have access to information that a client or customer doesn’t have access to today, is increasingly unrealistic.

The best advice is time sensitive

While the concept of advice is a constructive and affirmative one, the biggest question is can you get me the right advice when and where I need it? The concept that advice is best given in the branch, precludes the reality that the most acute needs often present themselves contextually whether in the form of a life goal, a problem, a hurdle, a crisis, or simply a decision.

Let’s look at the core of day-to-day financial decisions. Everyday a consumer is making decisions on what money to spend, what money not to spend, what product or not to purchase, and what money to allocate to my savings. The very concept of advice is that the “bank” should help you make wise financial decisions that contribute to your overall financial health. However, given the dynamics of the retail financial services industry, the last two decades have seen banks flock to credit offerings that offer higher margin, even if that is at the detriment of the customer’s overall financial health.

Call me cynical but bank solutions need to be aligned with and never in opposition to the financial health of our customers. Customers should not be plagued by countless fees, escalating interest and penalties. Nor should representations be made to them that banking services are ‘free’ when the hidden costs are anything but free. This is anything but ‘advice’ based banking.

The pendulum needs to swing back to helping customers and help is best given when and where I need it. Not waiting for that day once or twice a year that I come into a branch to get something done or fixed, and the teller has a sales metric to cross-sell or up-sell me a credit product I can’t really afford. That’s not advice.

This is where PFM is really going to come into its own. Real-time personal financial management is advice at scale, potentially. Help me live my financial life well, everyday. That’s real advice…

Gen-M: the abandonment of “touch and feel" and the emergence of "see and hear"

Baby Boomers and Gen-X have in common the need to experience life in all it’s glory. Whether that is born out of a sense of adventure, the need for tactile feedback or in the sense of face-to-face social connections, at the core of much of our buying behavior historically has been the need to ‘touch and feel’ a product before a purchase. There’s a subtle shift in this behavior with Gen-Y and Gen-Z/Digital Natives (sometimes collectively called Generation-M or the ‘multi-tasking’ generation) that is critical to understand if you are going to engage this community successfully moving forward, and it emphasizes why the physical store is under increased threat.

In the banking space I’m often confronted with passionate arguments for why face-to-face interactions, why the availability of advice and the psychological comfort of brick-and-mortar spaces still matter. The problem is that those describing these ‘values’ are inevitably Baby Boomers or Gen-X consumers, describing their comfort levels and buying behaviors. There are a number of key trends we can observe today that signify an abandonment of this traditional buying behavior for the next generation of customers.

The psychology of buying is changing

The last 10-15 years has already seen a significant shift in buying behavior as a result of changing distribution models. When the web started to mature and the dot com phenomenon emerged, we saw the first changes in buying behavior around the willingness to buy physical products like software, books and CDs via online stores. Over time this impacted the retail storefront of the book and music industries as less and less people visited physical stores. The argument oft heard, however, was that products like clothes, shoes, electronic goods, etc. still needed a good old storefront interaction. But success of brands like Zappos, Amazon with their broader retail, and the phenomenon of ‘showrooming’ and the influence of mobile in-store is part of a broader behavioral change, a change in buying behavior writ large.

Visual search and curation are rapidly emerging as key platforms for Gen-M consumers

Visual search and curation are rapidly emerging as key platforms for Gen-M consumers

Pinterest, Instagram, Tumblr, and other social networks are all very powerful communication tools for Gen-M. YouTube is their most popular search engine. Their connection to brands is no longer based on a need to touch and feel the product, or to connect face-to-face. Their connection is visceral, but driven by different senses. Generation M have moved from touch and feel, to see and hear as their new connection with brands, and it needs to happen at speed.

Take a Gen-X attending a concert. They go for the experience – to be a part of the event, experience the band live, to be immersed. The Gen-M digital native goes for the experience too, but they’re driven to share photos, video and to extend the experience of the event to their network. Personal connection to the experience is balanced with the need to share and talk about that experience.

The teenage female of the species would gather at the mall in the 80s and 90s to have a retail shopping experience with her friends, the experience wasn’t the purchase alone, but the collaboration, the social connections, the mall experience. They’d find their way as a group in the shopping environment, trends would develop based on what looked cool, what emerged through group consensus. Today that shopping experience is driven collaboratively online through shopping “haul videos”, discussions around back-to-school or spring break fashion and the like. Decisions on fashion choice aren’t driven by that in-mall collaboration or advertising messages, but through online advocacy, connection with the brand via content – not the store.


Michelle Phan is an example of a new brand that resonates more powerful with Gen-M that traditional media or brands

Michelle Phan is an example of a new brand that resonates more powerful with Gen-M that traditional media or brands

It’s why videos like this Lady Gaga Makeup Tutorial has 33 million views. No bank has ever got even a fraction of this type of advocacy-based engagement or traffic via YouTube today.

This is why advocacy of brands is such a critical driving force for this new generation of consumers. This is why they think in pictures, why they video themselves, why they check-in and share photos, why Instagram and Pinterest have grown so fast amongst this group. They want to have a visual connection with the product or brand, and they want to hear about the experience of the brand, whether directly from a friend or from a trusted platform such as their social network.

This is how Gen-M connects.

Advocacy is built through seeing and hearing a brand

So when you think about designing the next generation of banking or retail understand that the buying behavior of your core customers over the next decade is dependent on a connection of seeing and hearing what your brand is all about, not touching and feeling the product or brand in-situ, not getting advice or speaking to an expert. No one is a better expert than their friends in a network who’ve already tried your product out. The old concepts of Product, Place and Promotion don’t work in this space. Campaigns have very limited application, because they don’t trigger advocacy well and I’ll always trust my network over a brand message built by an advertiser.

How are your customers connecting with your brand in the see and hear space? Touching and feeling the product is no longer critical. Funneling customers into the store is no longer the best customer experience. Today it’s all about creating a connection with the brand through a product or service that I can advocate and share.

Why Apple’s NFC snub might hurt the banks and networks more than ever?

I’ve always maintained that Near Field Communication (NFC) was attractive for both the banks acting as acquirers and issuers, and ultimately the networks themselves. Particularly in the US marketplace. Why? The only way to keep the Point-of-Sale (POS) terminal in a transaction as we shift to mobile wallet and mobile payments at merchants is for banks and networks to seamlessly transition cardholders from ‘swipe’ to tap. The longer the banks and networks take to convert to NFC-enabled transactions, the more likely it is that the POS terminal will no longer offer value at the merchant space as we drive to wallet driven payments as opposed to the swipe paradigm.

What did we do before credit and debit card networks? We paid with cash and cheques. This was an asynchronous process that relied purely on you having either cash in your wallet (or your chequebook) and a merchant (we called them store owners back then) who would accept your payment. We might sometimes forget that there was a time when cards were not accepted and the equipment to process a card transaction didn’t exist, or hadn’t been deployed. In the early days the clunky knuckle-busters were the height of technology, but over time the networks started to deploy electronic terminals to reduce fraud rates, and improve clearing times.

It took almost two decades for card payments to become globally ubiquitous, so it might be reasonable to think that a paradigm shift at the POS will take years to become mainstream. Why would you spend money deploying expensive NFC-enabled POS terminals unless consumers were going to use them, right?

In normal circumstances, if there were no competition, this would make good business sense. The problem for the banks and networks is that they think the ‘card’ is defensible – that this product has enough inertia for consumers to not be bothered by the fact that they can’t yet pay with their phone at every POS terminal. In the US, this inertia has not only meant a slow roll out for NFC, but has also seen US merchants slip 7-8 years behind their EU counterparts. In the EU already 75% of cards support the EMV standard, and more than 90% of terminals, whereas in the US only 30% of merchants support EMV. So we hear frequent stories of US travelers in Europe unable to pay for the simplest of purchases or transactions with long outdated card tech. Worse for the US card industry is that the industry is paying 3c of every transaction in preventable fraud right now due to outdated signature and mag-stripe tech.

So you might think that Apple’s NFC snub supports the theory that there’s simply no hurry. Maybe Apple are simply waiting for NFC to become mainstream before they jump in. That’s undoubtedly part of the reason, but I think there’s another explanation, which presents real problems for the incumbents.

NFC is sometimes referred to by skeptical industry pundits as Not-For-Consumers. But the technology is sound, has been around for more than a decade, and is a logical transition when you are trying to move consumers from a plastic ‘swipe’ to a phone-based ‘tap’.

Let me tell you why I think Apple baulked this time around with NFC. I think there are three main reasons, but has little to do with the consumer adoption angle:

  • Firstly, the most obvious. Apple wants maximum utilization of their device and technology, and it’s likely true that they’re waiting for better US-based infrastructure (their home market and one of their largest) to support phone payments at the POS. Apple is not known generally at leading consumers with new technologies, they weren’t the first with an ‘MP3’ player, neither were they the first tablet manufacturer. Apple is known for their impeccable timing with new technologies, along with creating disruptive ecosystems to support those technologies (like iTunes).
  • Secondly, they don’t control the ecosystem and they’re not keen on providing tech that banks and card networks make money on, but they don’t. While it is true Apple has such phenomenal market and brand power that they could move the market on this, why move the market so that banks and card networks continue to make interchange fee, and Apple makes nothing beyond the handset sale?
  • Lastly, they’ve figured out that they just don’t need to support the existing POS technology to enable payments at all – so the longer banks and networks wait to deploy NFC ready merchant capability, the less likely it is that Apple will go for NFC all together. In fact, the lack of NFC industry adoption means Apple is choosing to pursue support for digital wallet solutions, taking the card and swipe out of payments all together.

Was it a good decision for Apple? That’s highly debatable, although, it isn’t going to hurt iPhone 5 sales. Apple could have re-released the iPhone 3G and called it the iPhone 5 and they probably would have sold 20 million units without blinking.

So does this mean there’s life left in Cards?
Hell no, not a chance. In fact, the lack of NFC roll out is actually creating significant momentum behind a much more serious and disruptive trend. The trend to go cardless and POS-less completely.

While banks and networks have been debating the merits of NFC, and while US merchant acquirers and card issuers have been debating the roll-out of EMV and new POS technologies, there has been a quiet but steadily growing shift towards payment experiences that don’t require a swipe or tap paradigm at all. Pay with Square, PayPal merchant payments, Amazon checkout, closed loop Mobile Apps like Starbucks’ app, or clever applications of back-end payments like Uber, Apple Store (App) and iTunes are rapidly growing in credibility, both at the POS and online through e-Commerce.

The beauty of NFC, for the banking industry, is that the industry could simply have migrated customers from card to phone and all the existing value chain stayed in place. You still needed a bank relationship, they issued you a card number (or Primary Account Number – PAN as it is known in industry speak) and you still went along to a merchant and used you bank generated account (now theoretically on a mobile phone with an NFC chip) to pay a merchant through their POS terminal. It is a simple way to keep the card and swipe paradigm going and it meant that both the issuing banks and the card networks kept getting interchange fee because there was no alternative to their incumbent rails.

The problem for the industry is that right now we’re doing away with the swipe paradigm altogether, primarily because there wasn’t a rapid enough adoption of NFC-enabled payments. We’ve simply circumvented the poor user experience of the swipe card, for a richer user experience on the mobile device.

Why do I say a poor user experience?

We live in a data rich world right now, where we can download books, music, even boarding passes to our phone. We can use our phone to track where our friends and family are, or communicate with them instantly. Our phones can keep track of our fitness levels, and spur us on to new goals of activity. We can use these same devices to find a restaurant, a bargain at a retailer, or just to find directions (that is if you aren’t using Apple Maps…)

Compared with this rich data platform, nuanced user experiences and the amazing capabilities of our smartphones, the humble plastic card is just plain dumb. It can’t tell us anything at all. Even when we use it at the POS, we can only find out if the transaction is approved or declined. When a transaction is declined, we’re none the wiser – we wouldn’t know if it were due to insufficient funds, whether the merchant has screwed up, or whether there is a hold on our card for some other reason. Payments just look dumb, old and out of date.

The driver for reinventing payments is not putting the card into the phone to get rid of the plastic in our wallet – it is about reinventing and leveraging a payment instance married with data. The trouble for the incumbents is that you just don’t need a card, a swipe or even a POS terminal when it gets down to it. A rapid transition to NFC would have saved the swipe-at-a-POS paradigm by allowing for a rich data support envelop around the payment.

With the poor industry adoption of next-gen POS payment tech, consumers and innovators are seeking that user experience without the swipe at all.

Maybe no card is better anyway
If you’ve tried Uber, for example, you would have pre-registered your account online or through an App and then the time comes for your first trip in an Uber car around town. You book a car through the app, and it shows you the driver coming your way via GPS and how far away he is. Then you’re in the car and off to your destination. When you arrive you exit the car and receive a receipt for the trip on your phone via the app. No card, no swipe, a seamless payment and ride experience. It’s the new paradigm of payment – seamless, frictionless, and information rich.

Uber – doesn’t need a swipe to offer better payments


Alternately you may have recently walked into Starbucks to order a No-Whip, Skim Soy, Mocha Frappuccino and a bagel (toasted), but at the point of sale you simply pull out your phone scan the App-generated bar code and you’re off. Soon you’ll be able to just say your name via Pay with Square at the Starbucks register and the payment will be processed, just like you can at merchants like Gregory’s Coffee today.

Whether it is Square, PayPal, Uber, Dwolla, Venmo, iTunes, Apple Store, Starbucks, or any other App-enabled digital wallet, we’re finding that we don’t need a swipe.

Now I know what you’re thinking – that we still need a card number, we still need an issuing bank, and we still need the merchant rails, right?

For now, yes.

The problem, however, for banks is that value stores such as Dwolla, Venmo, PayPal, iTunes only require you to pay a fee to the bank every time you top-up your value store account. Then, if you’re using a digital wallet to pay, you avoid interchange at the transaction level.

For solutions like Pay with Square, Apple Store, and Uber, there is obviously ongoing interchange fee for the network, but because the swipe paradigm has been removed, the back-end rails could be replaced with another P2P (peer-to-peer) payment network solution that avoids the Visa and Mastercard rails all together, perhaps through use of the cloud.

In fact, the fastest growing payment class today would simply be classified as peer-to-peer electronic payments. Increasingly merchants and consumers are going to be seeking simply to make a payment and the incentives to pay in real-time directly from one bank account to another. This is becoming the holy-grail in payments. The problem is that ultimately a P2P real-time payment could entirely circumvent the card networks.

So whether you are a bank or a card network – the decision of Apple to avoid NFC probably just killed your chances of keeping the status quo of interchange via the card/swipe paradigm.

The likelihood is that the digital wallet, whether via a smartphone initiated payment or simply built contextually into shopping experiences, has got too much momentum now to save the swipe paradigm. The next step is simply to avoid interchange, the networks and traditional value stores all together. That’s where merchants and start-up want to take this, and they’re all leading with a better user experience than the existing incumbents. It’s all up for grabs now…

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