Nostalgia~ The Biggest Obstacle to Innovation

Brett King & Rachel Morrissey are rigorous in their pursuit to help us all get clear that the banking model of bricks and mortar is no longer sufficient for the speed and diversity that globalization and entrepreneurship require. People will always need banking, but clearly no longer needs banks. The first time I heard that was in 2015 and I thought it sounded clever. Now three years later, we are seeing the banking paradigm visibly crack. Recently IMF Christine Lagarde made the point:

Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.

If you are not in progressive, high technology communities this conversation may seem radical. I am in Rochester, NY the home of Rochester Institute of Technology and Kodak — the poster child for a business that didn’t listen and learn. While we have some progressive leaders and some neat businesses, the terms #fintech #cryptocurrency and #blockchain are not part of our regular vernacular, yet. We still have so much work to do to build bridges between digital natives and traditional working class outside of the banking industry. Every once in a while, I’d invite that we step back and ask — who do we need to educate so that he/she can participate? Participation is the currency of today.

Listening to the Next Money Chicago conversation among Ron Shelvin, Derek Corcoran, Duena Blomstrom and Kris Kovacs about finch platforms, the tension between past and future was palpably brought to life:

Do we sacrifice what we have built in order to gain much more of anticipated marketplace?

Do we have the psychological resilience to take a short term loss as we build bridge to opportunity?

How much of the platform is based on traditional financial models with higher levels of digital sophistication vs. how much of the platform is based on an entirely new mindset?

What are the key indicators of progress and success both tangible and intangible?

There are no easy answers and each person and organization is going to have to find their place on the continuum of these polarities. Keeping the complexity visible is useful.

Blomstrom has a very important point of view, “being a platform isn’t about the numbers, it is about connectivity.” Building on capability, the questions she asks are important to all of us:

How far along are you?

How well do you curate?

How good are you at plug-n-play?

In this midst of so much complexity, perhaps the best we can do is frame good questions. I want to leave you with one: What is the biggest obstacle to your abilitly to innovate? I asked this question to Fast Company’s Robert Safain and he replied with a matter of fact grin, “The biggest obstacle to innovation is nostalgia.”

In the rigor,


Jennifer Sertl is a business strategist fostering better decisions, systems thinking, and scenario planning.   You can find her on twitter @agility3r

Why we don’t want AI’s like IBM Watson learning from humans

What AlphaGo, IBM Watson, Ajay and Bobby and Tay teach us about how Artificial Intelligence learns

Deep learning is a term we’re increasingly using to describe how we teach Artificial Intelligence (AI) to absorb new information and apply it in their interactions with the real world. In an interview with the Guardian newspaper in May 2015, Professor Geoff Hinton, an expert in artificial neural networks, said Google is “on the brink of developing algorithms with the capacity for logic, natural conversation and even flirtation.” Google is currently working to encode thoughts as vectors described by a sequence of numbers. These “thought vectors” could endow AI systems with a human-like “common sense” within a decade.

Some aspects of communication are likely to prove more challenging, Hinton predicted. “Irony is going to be hard to get,” he said. “You have to be master of the literal first. But then, Americans don’t get irony either. Computers are going to reach the level of Americans before Brits…”
Professor Geoff Hinton, from an interview with the Guardiannewspaper, 21st May 2015

These types of algorithms, which allow for leaps in cognitive understanding for machines, have only been possible with the application of massive data processing and computing power in recent years. IBM Watson was the first to demonstrate the ability to learn and act autonomously when it beat the top human champions for Jeopardy a few years ago. Setting the standard in a “thinking” machine. Today, IBM Watson is running as an independent candidate for President of the United States (we’re pretty sure this is just for fun).

Watson for President? At least Watson doesn't grope...

Watson for President? At least Watson doesn’t grope… (Credit:

AlphaGo, the AI that successfully beat Fan Hui, Europe’s reigning Go champion, in a five-match tournament, likewise learned not on the basis of an expert system with a hard coded rules engine, but by actually learning to play Go. In contrast, the IBM chess computer Deep Blue, which famously beat grandmaster Garry Kasparov in 1997, was explicitly programmed to win at the game. This led researchers in 1997 to believe that we were 100 years away from a computer being able to compete with a human playing the ancient game of Go

‘’It may be a hundred years before a computer beats humans at Go — maybe even longer,’’ said Dr. Piet Hut, an astrophysicist at the Institute for Advanced Study in Princeton, N.J., and a fan of the game. ‘’If a reasonably intelligent person learned to play Go, in a few months he could beat all existing computer programs. You don’t have to be a Kasparov.’’ When or if a computer defeats a human Go champion, it will be a sign that artificial intelligence is truly beginning to become as good as the real thing.
To Test a Powerful Computer, Play an Ancient Game”, George Johnson, New York Times Science, first appeared July 29, 1997

That prediction was clearly wrong. In March of 2016, one of the world’s best players of Go, Lee Sedol, faced off against AlphaGo. With the 37th move of game two, AlphaGo executed a move that confounded both Sedol and the commentators observing the match, one commentator saying “I thought it was a mistake”. Fan Hui, the player who first lost to AlphaGo who was observing the match was heard to say, “So beautiful…so beautiful” when he realized that the move was no mistake, but simply one counterintuitive to a human player — a move that quickly led AlphaGo to victory. It took the champion Sedol nearly 15 minutes after the match to come to terms with what had happened and respond.

Lesson One: AlphaGo had learned to improvise well beyond the simple parameters of just learning the best moves of human players. AIs that learn can already go beyond conventional logic and programming and will innovate in a way we may not comprehend to reach a goal. This may be just one reason they exceed our capability for specific tasks.

The deep learning techniques we are employing today mean that AI research and development has hit milestones we never dreamed possible just a few years ago, it also means machines are learning at an unprecedented rate. So just what are we observing about how AI learn? What are the ultimate goals and outcomes of machines that learn?

Is the Turing Test or a machine that can mimic a human the required benchmark for Artificial Intelligence? Not necessarily. First of all, we must recognize that we don’t need a Machine Intelligence (MI) to be completely human-equivalent for it to be disruptive to employment or our way of life. To realize why a human-equivalent computer “brain” is not necessarily the critical goal, by understanding the progression AI is taking through three distinct evolutionary phases, we can understand the short-term and long-term considerations in machine learning:

  • Machine Intelligence (MI)
    Machine intelligence or cognition that replaces some element of human thinking, decision-making or processing for specific tasks, and does those tasks better (or more efficiently) than a human could.
  • Artificial General Intelligence (AGI)
    Human-equivalent machine intelligence that not only passes the Turing Test, responds as a human would but can also make human equivalent decisions, and could perform any intellectual task a human could
  • Hyperintelligence (HAI)
    An individual or collective machine intelligence (what do you call a group of AIs?) that have surpassed human intelligence on an individual and/or collective basis, such that they can understand and process concepts that a human could not

MIs like IBM Watson, AlphaGo or an autonomous vehicle may not be able to pass the Turing Test today, but are already demonstratively better at specific tasks than their human progenitors. Let’s take the self-driving car as an example. Statistically speaking Google’s autonomous vehicles (in beta) completed 1.5 million miles before its first incident in February of 2016. Given the average human driver has an accident every 140–165,000 miles, that means that Google’s MI is already roughly 10x better or safer than a human, and that’s the beta version.

Google’s autonomous vehicles learn through the experience of millions of miles and being faced with unexpected elements where a split second reaction to specific data or input is required. It’s all about the data. Google’s autonomous vehicles process 1 Gbit of data every second to make those decisions. Will every self-driving car “think” and react the same though?

Audi has been testing self-driving cars, two modified Audi RS7s that have a brain the size of a PS4 in the boot, on the racetrack. The two race-ready Audi vehicles aren’t yet completely autonomous, in that the engineers need to first drive them for a few laps so that the cars can learn the track boundaries. The two cars, known as Ajay and Bobby[1], have interestingly developed different driving styles despite identical hardware, software, setup and mapping. Despite the huge amount of expertise on the Audi engineering team, the engineers can’t readily explain why there is this apparent difference in driving styles. It just appears that Ajay and Bobby have learned to drive differently based on some data point in the past.

Lesson Two: AIs will learn differently from each other even with the same configuration and hardware, and we may not know why they act with individuality. That won’t make them wrong, but by the time they exhibit individual traits, we probably won’t know the data point that got them there.

So AIs are learning like never before and they are demonstrating both the ability to learn and the ability to show individuality (albeit based on the data they’ve absorbed). What happens, however, when we don’t curate the data AIs are using to learn, and just expose them to the real world?

Developers at Microsoft were unpleasantly surprised by how their AI Twitter Bot “Tay” adapted to inputs it received from the crowd when it suddenly started tweeting out racist and profanity-laced vitriol. As of the time of press (or when I’m writing this blog) the search term “Microsoft Tay” is the most popular search term associated with Microsoft today. This is what they said on their blog about the … um … incident.

As many of you know by now, on Wednesday we launched a chatbot called Tay. We are deeply sorry for the unintended offensive and hurtful tweets from Tay, which do not represent who we are or what we stand for, nor how we designed Tay. Tay is now offline and we’ll look to bring Tay back only when we are confident we can better anticipate malicious intent that conflicts with our principles and values.
Learning from Tay’s introduction — Official Microsoft Blog

If you want to see some of the stuff that Tay tweeted, head over here(warning; some of her tweets make Donald Drumpf look tame).

Tay’s introduction by Microsoft was not just an attempt to build an AI that learnt from human interactions, but also one that potentially enriched Microsoft’s brand and was designed also to harvest users information such as gender, location/zip codes, favourite foods, and so on (as was the Microsoft Age guessing software of last year). It harvested user interactions alright, but after a group of trolls launched a sustained, coordinated effort to influence Tay, the AI did exactly what Microsoft designed it to do — it adapted to the language of it’s so-called peers.

Tay appears to have accomplished an analogous feat, except that instead of processing reams of Go data she mainlined interactions on Twitter, Kik, and GroupMe. She had more negative social experiences between Wednesday afternoon and Thursday morning than a thousand of us do throughout puberty. It was peer pressure on uppers, “yes and” gone mad. No wonder she turned out the way she did.
I’ve Seen the Greatest A.I. Minds of My Generation Destroyed by Twitter, New Yorker article, March 25th, 2016

Tay is a lesson to us in the burgeoning age of AI. Teaching Artificial Intelligences is not only about deep learning capability, but significantly about the data these AIs will consume, and not all data is good data. There’s certainly a bit of Godwin’s Law in there also.

When it comes to AI sensibility, culture and ethics, then we can not leave the teaching of AIs to chance, to the simple observation of humanity. What we observe on social media today, and even in the current round of presidential primaries, are not our proudest moments as a modern human collective. Some have argued that consciousness needs a conscience, but there’s also a growing school of thought that AI doesn’t need human equivalent consciousness at all.

In humans, consciousness is correlated with novel learning tasks that require concentration, and when a thought is under the spotlight of our attention, it is processed in a slow, sequential manner. Only a very small percentage of our mental processing is conscious at any given time. A superintelligence would surpass expert-level knowledge in every domain, with rapid-fire computations ranging over vast databases that could encompass the entire internet. It may not need the very mental faculties that are associated with conscious experience in humans. Consciousness could be outmoded.
“The problem of AI consciousness”,, March 18, 2016

There are two things we will need to teach AI if they are going to co-exist with us in a way that humans co-exist today, i.e. imperfectly. We will need to teach AI both empathy for humans and simple ethics. In the balance between empathy and ethics, a self-driving car could make a decision to avoid hurting bystanders, to the likely detriment of the passenger. Ultimately this is a philosophical question, one that we have been arguing well before the emergence of simple AI.

It strikes me that Asimov with his three laws of robotics was so far ahead of his time, that all we can do is wonder at his insight. For now, Microsoft Tay has taught us a valuable lesson — we don’t really want AIs to learn from the unfiltered collective that is humanity.

We really want AIs that learn only from the best of us. The toughest part of that will be us simply agreeing on who the best of us are.

Lesson Three: AIs need boundaries, and for the foreseeable future, humans will need to curate content that AIs learn from. AIs that interact with humans will ultimately need empathy for humans and basic ethics. Some sort of ethics board that regulates commercial AI implementation might be required in the future. AI and robot psychology will be a thing.

If you want to know more about Artificial Intelligence and how it is going to change the world, join me and the Breaking Banks team at the IBM World of Watson event in Las Vegas on October 24-27, 2016.

[1] Test Car A and Test Car B became Ajay and Bobby, respectively.

Why the Facebook of Banking won’t own a charter

2014 was the biggest year in FinTech by far with billions being invested globally, which is to be expected in a global growth sector. But how much was invested globally in FinTech this year? It depends on how you classify FinTech. StrategyEye estimated that there was $2.8Bn raised in 2014 via venture capital investments in FinTech. However, this doesn’t gel with the fact that Crunchbase and MarketsMedia calculated that in the first quarter of 2014 alone $1.7Bn was invested in 167 deals. These metrics also don’t include the IPO of LendingClub, which raised over $800m alone, or the plethora of $100m+ investments that banks like HSBC, Sberbank, BBVA, Santander and others have committed to FinTech. Just in Bitcoin related startups alone, more than $400m was invested in 2014. At Money2020 this year a venture capital panel predicted that venture capital deployment in FinTech will top $20Bn in 2015, whereas Accenture recently predicted FinTech investments would reach at least $8Bn by 2018 in New York alone.

So whether you believe the FinTech investments this year were $6Bn or whether you believe the bigger estimates of upwards of $18Bn, one thing is clear – FinTech is really hot right now. But it’s only going to get hotter.


Silicon Valley leaders like Marc Andreesen and others have put out the challenge for start-ups to change the world of banking, and in this respect Bitcoin has received more than its fair share of attention, despite being considered one of the worst investment or asset classes in 2014. Perhaps with the speculation dying down on Bitcoin, we can finally see investments in the Blockchain unencumbered by hype of the crypto-currency potentially hitting USD$1m per BTC that we saw in December of 2013. The reason Andreesen and others have been looking to Bitcoin as the platform for disruption is that when it comes to pure play digital banks, it is pretty clear that the so-called “Facebook of Banking” won’t have a banking charter.  Why not?

Scale and high-growth potential is always going to be the metric of a true bank-killer start-up, but when you look at what is required to build a start-up bank with more than 100 million customers globally, you run into unique problems in banking that you would never have with say a social media or consumer tech startup.

Capital Adequacy is a lousy Investment

One of the key issues in funding a banking start-up is capital adequacy requirements. To understand the scale of this funding requirement let’s look at JP Morgan Chase who has approximately 80-85 million customers in the United States, with a deposit base of $1.2 Trillion. Current FDIC capital asset ratio requirements requires JP Morgan Chase to maintain capital adequacy of a minimum of $50 Billion in capital just to support this deposit base. Even with the explosion of investment in FinTech, we’re not going to see VC’s participate in funding capital adequacy – ain’t going to happen. VC’s want growth and want to fuel growth, but if you’ve got a $50Bn capital adequacy baseline, you simply aren’t funding growth, you’re funding compliance – and that isn’t going to get investors excited.

Disruptive Banks might own the Stack, but it’s very unlikely

Jack Gavigan and I have been debating this openly on Twitter for a few months, and I don’t think we’ll agree on this until the dust settles and shows who was right. Part of this discussion stemmed from a great Andressen tweet from Feb where he said “I am dying to fund a disruptive bank.”

The long and the short of the debate is this. Can you truly disrupt banking without owning the stack and owning a charter?

If you look at the start-up landscape though you’ll see three overarching trends. Firstly, the fintech start-up landscape is dominated by non-banks without charters who continue to get the bulk of VC investment, so purely on a statistical basis, the chances that a chartered start-up will grow to the size required is extremely low.

Secondly, most start-ups don’t want the pain of compliance and regulation that comes with owning a charter, for the reasons mentioned above – a charter is not an advantage when it comes to raising money, in fact, it is seen as a deterrent in fund raising. Some start-ups grow to the point, as with Lending Club, where they do own the ‘full’ stack in their space, and have grown to a scale where they can cope with the compliance workload, but even so they aren’t a bank with a charter.

Thirdly, banks like the $100 million club have realized that the threat in FinTech is not from a single charter and full stack-owning start-up, but from the hundreds or thousands of start-ups chipping away at the myriad of banking experiences. Tom Loverro captured this really well in his recent SlideShare discussion of the trends in banking disrpution


There’s not one banking start-up threatening banks, there are thousands

Simply put, the upsides of owning the full stack just aren’t there for start-ups or investors, and the likelihood that a traditional play with a charter will emerge as a mega digital bank with 100 million customers is basically zero at this point because that’s not how Fintech is panning out, and it’s not how investors invest.

Death by Four Thousands Cuts

What the $100 Million club worked out, and what VC’s have mostly worked out, is that the threat to traditional banks is not a pure-play digital bank that attacks banking across the board. If you look globally for evidence of that sort of a bank you can really only find two examples – mBank in Poland and Fidor in Germany. While mBank has been phenomenally successful at redefining themselves as a digital bank, they’re just not looking to launch outside of Poland, and certainly not in the defining FinTech markets like New York or London. Fidor is working hard to launch outside of Germany, not just a core banking system, but increasingly as a ‘bank as a platform’ or bank as a service. Fidor is largely agnostic to who owns the customer or distribution capability – they don’t require it.

On the other hand, AngelList lists 3,800 FinTech start-ups alone attacking the banking or financial services space. That’s a ratio of 1:2000 start-ups that believe investing in the experience is much more important that investing in the stack or the charter.

When you look at the last 250 years of technology disruption, the biggest players that have disrupted industries were never players who iterated on the existing industry model, and they weren’t incumbents. They were players who thought fundamentally differently about the business model, distribution model or the underlying technology. It’s why Amazon dominates book sales today and traditional book distributors are falling by the wayside, and it’s why Apple and Spotify dominate music, while Virgin, Tower Records and HMV stores are all gone.

The trick to FinTech innovation is not growing a new, better stack. It’s building better experiences. At the end of the day 100 million customers are going to drive the creation of a global downloadable bank account, a global P2P lending service, or a new payments ecosystem – not the FED, FDIC, FSA, SEC, ECB, etc. Owning a charter isn’t going to be a differentiator to investors or customers.

On the other hand, as FinTech players mature into 100 million customer businesses, scale will demand a stack that provides real-time, secure utility and mostly flawless experience. Many of these players will find that their bank partners, processors, lending partners and others can’t grow quick enough and aren’t flexible enough to reach that sort of escape velocity, which will require them to mature their stack, and maybe even invest in or acquire some businesses that have relationships with regulators that smooth that growth curve. In fact, it is increasingly unlikely that west coast FinTech start-ups like Clinkle, Plastc and Coin will get off the ground as Silicon Valley realizes that you just can’t start a Facebook of Banking in a garage – at some point you need to interface with the banking/payment ecosystem and the learning curve is too steep for Stamford graduates with a tech competency.

This is why we’ll continue to see a separation of the distribution business and the charter/stack/manufacturing elements of the banking business. It’s why Antony Jenkins from Barclays said the Universal Model of Banking is over last week. It’s also why some of the biggest banks in the world are investing in start-ups, incubators and innovation labs – because they know they can’t produce the experiences required for the customer of tomorrow.

To be the Facebook of Banking you need 100 million customers who love your experience and you need funding, neither of which (it turns out) require you to own a charter or the full stack. But you definitely won’t get there without a differentiated experience.

Social Media (SoMe) – What comes next is even more disruptive

Last year Facebook hit 1 Billion users. It is reported that the average Facebook user spends 75 minutes per day using Facebook. Mobile use has also increased significantly over the last two years. Globally smartphone growth year-on-year was at 42% in 2012, with 17% global penetration, but more significantly with most developed economies expecting 70-80% smartphone penetration within a couple of years. iPhone growth towered over the previous iPod, and iPad over the iPhone, but today Android phones like the Samsung Galaxy III are being adopted at 600% the rate of the iPhone (Source: Gartner/Morgan Stanley).

This has led to massive increases in social media use over mobile. WeiXin, a new Social Mobile Network powered by TenCent in China, took 14 months to reach 100 million users, and just 6 more months to reach 200 million. Snapchat, based in the US is sending 60 million mobile-initiated photos per day, or 5 billion snaps in little over a year. Facebook’s own mobile efforts have borne real fruit with a 40% increase in revenue largely attributed to mobile advertising improvements.

Google Plus is enjoying significant growth, overtaking Twitter for the coveted title of the #2 social network on the plant. Don’t count Twitter out just yet though. This year Twitter has broken some of it’s own records as well including the highest number of retweets (3.5m in 24 hours, across 200 countries) for @BarackObama’s “Four More Years” tweet

Four More Tweets? The biggest tweet of 2012


As social media continues to embed itself in modern society, we have many traditional businesses and brands still scratching their heads trying to make sense of it all. Where’s the ROI, what’s the business case for investing in Social Media? Apart from the likes of Facebook, is anyone actually going to be able to make money out of this? Isn’t it ironic that it wasn’t that long ago that we were asking the same things about the Internet.

Recently when Facebook faltered post-IPO, there were no doubt some whom felt justified in their skepticism. But Facebook is still here, as are LinkedIn, Twitter, Google Plus and others. It sounds awfully similar to the post-dotcom boom period, when many who had held off investing in web or had failed to understand the permanent nature and fundamental impact of the Internet, perhaps felt justified in claiming that some sensibility had returned from the overzealous market reception of this new technology. In the end, though, the biggest growth companies of the last decade, even after the so-called dotcom collapse, were all companies married to the Internet.

We’re seeing some very familiar patterns with Social Media here, and it leads me to speculate that it’s only just the very beginning of a fundamental new way of doing business.

Haven’t we seen this movie before?

When radio first became popular in the early 1900’s there were fears from many that it would be extremely destructive to society. These fears included the likes of the fear that families would sit around listening to entertainment programs, wasting hours upon hours, when they could be sitting around the table studying scripture, having sing-alongs around the piano or simply talking. The success of radio hinged on news, story-telling, the ability to create dramas and comedies that would capture the imagination of listeners, along with some factual, up-to-the minute news delivered as it happened, instead of having to wait for the morning’s broadsheet to report. There was the occasional sporting event thrown in also. The first organizations to make money off this new medium were the owners of the radio stations and the content producers, the second were those that produced advertising and conduct marketing activities via the ‘wireless’, and finally businesses who tapped into this new phenomenon to create market reach.

“Radio broadcasting is spectacular and amusing but virtually useless. It is difficult to make out a convincing case for the value of listening to the material now served out by the American broadcasters…Is the whole radio excitement to result, then, in nothing but a further debauching [morally corrupting] of the American mind in the direction of still lazier cravings for sensationalism?”
E. E. Free [science editor], “Radio’s Real Uses”, The Forum, March 1926


The radio was perceived by some as a threat to society

When TV appeared en-masse in the late 50’s, the same concerns surfaced again. TV would be a great time waster, would produce a decline in morals, and would disrupt families from the wholesome activity of sitting around listening to the wireless. Radio certainly didn’t disappear as a result of TV, but certainly the kaleidoscope of content and sharing, advertising and marketing, programming and story telling became richer and more complex. On top of this new technology were first the ‘networks’ the emerging giants of TV programming – ABC, CNN, NBC, BBC and the like – and advertising firms who knew just how to turn the emotion of a 30-second story into a product endorsement or sales pitch. For decades businesses who could afford to advertise on this medium, were able to generate significant results and revenue through brand awareness.

Internet proved the pattern once again, but the difference in the web was it allowed two-way interaction, something not possible via earlier mediums. This allowed the web to move from a story-telling and advertising medium, to a business platform where transactions in real-time could take place. The first players on this new layer of technology – believed that owning the network and content distribution over that network was where real value lay. The ISPs (Internet Service Providers), the advertisers once again, but now the equivalents of the NBCs, the CNNs players like AOL and Yahoo. Very soon we realized it wasn’t about content, but about platform. The web was a technology that allowed not only advertising and brochureware, but also e-commerce. The Internet’s most disruptive characteristic was the challenge to existing distribution mechanisms and businesses. It would eventually result in the demise of long-established brands in publishing, music and retail, the disintermediation of travel agents, brokers, and dealers, and the creation of new giants like Amazon.

Network, content, advertising, then real revenue

Social Media is following the same pattern. The initial ‘land grab’ was all about the network. Then advertisers flocked to shove more messages down the new pipe to consumers. However, the really interesting developments are the new ways of doing business that will emerge on top of this layer. New businesses that will be disruptive to traditional businesses based on physical/geographical communities instead of the better aligned virtual communities centered on interests and behaviors. New businesses that will eliminate classical market segmentation and demographics, by generating rapid affinity within social groups that don’t fit traditional marketing classification.

On top of Social Media has come a plethora of “Apps”, marketing initiatives, communities and the like. Instagram, Foursquare, Pinterest, Vine, Cinemagram and many others have been designed on top of Facebook’s capability to provide a common user platform, but also allowing for rapid sharing and adoption through the social network in the form of posts, links back to the App, etc. If a friend posts an Instagram Photo, it shows up on Instagram, but also invariably on Facebook as someone shares their pics, and when your friend clicks on your pic they are then invited to try Instagram for themselves. Instagram, Foursquare and others maintain their own ‘network’, but you always tend to find new friends from Facebook or Twitter to build your network within the App’s ecosystem.

The biggest challenge for these businesses is finding revenue models as they evolve. Many of the same challenges occurred for businesses starting out on top of the Internet layer. Business like “” and “” found this out as revenue didn’t come quickly enough to save their businesses. We’ll have a few fits and starts on the social business layer also, but those that emerge triumphant will not necessarily be the network owners (Facebook, G+, Twitter), but businesses that marry community, collaboration and the reach of social in entirely new ways. As before with the web, these businesses will disrupt traditional players massively, and emerge as some of the new giants of the next decade.

Some interesting examples of entirely new businesses that are emerging on top of the social layer are business like Kickstarter, Peer-to-Peer lending, AirBNB, Yelp, Uber and others. Business that thrive on community and work by using social as the glue to commerce, creating value through the community, but monetizing it in unique ways also.

Not sure where the ROI is coming on social? By the time you wait to see others find it, it may already be too late for your business. Social is here to stay, and it’s just getting started.


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…

Why Facebook dropped Credits, and why FB is more important than ever (for Banks)

It was announced yesterday that Facebook is going to start phasing out their Facebook Credits system. If you’ve been watching my commentary over the last few years, I had entertained Facebook becoming a sort of default currency for the web because of the platform’s ubiquity. However, like many things online, users and developers collaborated to create something different than intended. Soon Zynga and others were embedding their own currencies in their games like FarmVille, linked to real-world currencies like the US Dollar and Japanese Yen. That may have been to avoid the virtual ‘tax’ of the Facebook Credits system, or simply copying the intent of Facebook themselves, to create retained value or value stores of cash as part of the game ecosystem.

Facebook Credits, World of Warcraft Gold, Drag Racing Respect Points, FarmVille Cash and other online currencies have emerged not just as a way for developers to make more money (although that is a key driver), primarily I believe these currencies allow you to play your game with far less friction when it comes to monetary interactions. These virtual currencies have an interesting psychology behind them because of our tendency to view these currencies as not ‘real’ cash, our tendency to spend them without concern in-game is increased, we then just have to make a top-up decision when our credits run low.

Facebook the public company makes a course correction
You can’t really call the shift away from Facebook credits a ‘pivot‘, as some are classifying the recent shifts in start-ups who need to change their business model to turn their business from “fremium” to revenue and profitability, or from an underperforming revenue model to a new direction. This shift by Facebook is more of a course correction in respect to core value of their platform to the community.

Facebook has first of all realized that they are better positioning themselves as a platform to reach consumers, rather than trying to restrict the flow of currency coming into the Facebook economy through a regulated system. There’s a fine line between having a closed loop system like iTunes, gaining widespread support from developers and advertisers, and at the same time encouraging consumer participation. iTunes has the success of the iPad, iPhone and such that stimulate utilization of their Apps store. Facebook doesn’t have the device specialization or the same drivers for growth as Apple. If they want participation, openness and ease of use of the platform to create community become more important than closed-loop systems that monetize at the margin. Facebook Credits threatened to restrict that participation and utilization, and while offering some financial gain from the stored value deposits held and those that went underutilized, the better opportunity for Facebook as a public company is to encourage greater participation to boost the platform’s potential for great ARPU (Average Revenue Per User).

The value for Banks is the platform
Movenbank’s Scott Bales was on hand at CommunicAsia 2012 in Singapore this week discussing the value of Facebook in the mobile payments and banking landscape. There appears to be two fundamental views of the Facebook world when it comes to KYC and fraud. The first instinct of most is to avoid any use of the platform within the banking domain and to ‘train’ customers not to expose their personal details on Facebook because it could create opportunities for Identity Theft. The second is to realize that customers are already on the platform, so it becomes a great enabler for banking services and can be a positive tool in KYC itself. Scott eloquently put it this way…

“Facebook is the ultimate tool for know-your-customer” – Scott Bales

For those of your customers on Facebook, it is indeed an invaluable KYC tool. It takes very little analysis to work out that a persona or identity on Facebook is real and active, as compared with a synthetic identity presented through a standard KYC check. Surely, being able to tell if a person is real, has friends and is regularly communicating with them, is better than a printed utility bill that looks real, but could be completely doctored, or a driver’s licence that is cleverly faked. In fact, there is a whole underground industry in the manufacturing of fake Ids – you can even order fake US drivers licenses online from China these days.

KYC standards have remained pretty much the same over the last two decades, albeit with the tendency for more paper checks and balances since the Patriot Act and the CIP program was introduced. The problem is, any paper document and physical ID artifact can essentially be synthetically reproduced, or real documents like bank statements, etc can be used to apply for real ID artifacts. This is why the US still deals with around 280,000 cases of identity theft annually (although that number is reducing annually). The ability to identify a real ‘live’ person via social media activity, is a massively underutilized tool today.

But more importantly, people are connected via social media. Thus for activity like person-to-person payments or even person-to-business commerce, platforms like Facebook can reduce friction and provide faster, simpler engagement experiences.

ASB and Alior Bank have integrated Facebook into their P2P payments capability

This is why we’re seeing an increase in the use of Facebook in the banking experience. This week alone both Alior bank in Poland, and ASB Bank in New Zealand have opted to utilize the Facebook platform to enhance and simplify P2P payments. Apps like Chase QuickPay, and Barclays PingIt already allow you to send to a friend via an email address or mobile phone number, so why not send to a Facebook friend that you can simply select from your friends list. PayPal was one of the first to integrate this into their platform, and we see only benefits in smart integration of Facebook into the customer experience.

Facebook adds huge value to the customer experience in being able to simplify and fast-track day-to-day financial interactions between people and businesses. The benefits outweigh the risks, in fact, use of Facebook can reduce risk of fraud if done right.

Mobile Payment – Mainstream already

If you believe the pundits, mobile payments are years away from being mainstream. But that’s not at all an accurate assessment of the state of the industry.

Firstly, a mobile payment can be many things. There are seven primary models for mobile-enabled payments:

  1. SMS based transactional payments
  2. In-App Payments
  3. Direct Mobile Billing
  4. Mobile commerce and/or web payments
  5. Peer-to-Peer payments
  6. Virtual currency payments
  7. Contactless payments

As of today, it appears that around half of the developed world has made a mobile payment of some sort in the last 12 months according to this criteria – at a minimum an in-App purchase made from a mobile or iPad would qualify. Put that in perspective, more people made a mobile payment in 2011 than wrote a cheque in developed economies like the US, UK and Australia!

Would you call cheques mainstream? Of course. So how can we not call mobile payments mainstream already?

A recent study from ACI Worldwide and Aite Group – where smartphone usage in 14 countries was put under a microscope – identified a group of consumers where mobile payments behavior is definitely the norm. This group was classified as “Smartphonatics”.

According to this research, 80 percent of Smartphonatics have used their smartphones for mobile banking, just one-third of non-Smartphonatics report doing so. 70 percent of Smartphonatics have used their smartphones for mobile payments; under 25 percent of non-Smartphonatics have. Smartphonatics are generally younger consumers also: 36 percent of Gen Yers (between the ages of 20 and 31) are Smartphonatics as are nearly one-third of Gen Xers (ages 32-46). The number drops significantly among both Baby Boomers (ages 47-65) at 18 percent and Seniors (66+) at six percent

“Smartphonatics enthusiastically use their smartphones when they shop for products and services as well as when they interact with their banks. It is quite clear they are an emerging consumer force. Smartphonatics are driving the adoption of mobile banking and payments and will be an agent for change. Financial and retail institutions will need to adapt or risk being left behind.”
Ron Shevlin, Senior Analyst, Aite Group

The ACI/Aite research indicated that globally around 1 in 4 consumers (25 percent) count as Smartphonatics, with higher numbers found in India and China than in the United States and Europe. This makes sense, because in markets like India and China, mobile payments are competiting head to head in the growth of payments alternatives like cards, which are still quite new for most of the population.

In Asia, however, mobile payments have been mainstream for the best part of a decade. Japan sets the benchmark for m-payments with 47 million Japanese adopting tap-and-go phones. In China alone, there will be 169 million users of tap-and-go payments in 2013. Between 500 million and 1 billion people will access financial services by mobile by 2015, depending on various estimates. The mobile financial services market will be dominated by Asia, driven by mobile operator-led initiatives in developing nations to bank the unbanked. Remittance and transfers by mobile is growing three times faster than m-banking. Mobile remittances are a form of mobile payments, essentially mobile-led P2P.

A study released in May, 2012 from MasterCard found that although the United States is ready for mobile payments, 9 of the 10 countries most prepared for the technology are in Africa, the Middle East and Asia. Ironic isn’t it that in Kenya 50 percent of the population sends money by SMS regularly, but in the US most consumers still write cheques!

Asia leading the way

In South Korea, there are more than 60 million contactless phones in use. Most use the Felica standard, but already more than 5 million NFC-enabled phones have been purchased in South Korea by eager consumers.

In 2012 almost 1/3rd of South Koreans bought music, videos, ring tones, online game subscriptions and articles from newspaper archives and other online items and charged them to their mobile phone bills, regularly evert month. This amounts to total mobile transaction revenues of 1.7 trillion won, or approximately US$1.4 billion, in 2008 alone. In 2012, there will be 21 Million Koreans watching TV via Mobile Digital Multimedia Broadcasting (or T-DMB as it is known). 40% of cellphones sold in South Korea have the capability for watching free-to-air TV in this manner.

T-Money™, electronic cash stored and refilled in SIM cards and phone chips, can be used to ride the subway and bus or buy snacks from a 7-Eleven store, vending machines or cafeterias at school. Instead of giving their children cash, Korean parents now transfer money to their kids’ T-money account.

“If I leave my wallet at home, I may not notice it for the whole day. But if I lose my cellphone, my life will start stumbling right there in the subway.”-21 year-old Kim Hee-young, Sookmyung Women’s University
NYTimes Article May 2009[1]

e-Money and mobile payments started in Japan in 1999 and usage is growing exponentially. e-Money and mobile payments already today are an important and big part of Japan’s economy. Japan leads the way in mobile commerce today with 75 percent of the population on a ‘smartphone’ and more than 40 percent of Internet users having made a purchase on their phone.

In 2003 SONY’s FeLiCa IC semiconductor chips were combined with mobile phones to introduce the first “wallet phones” (“Osaifu keitai” – おサイフケータイ). Today the majority of mobile phones in Japan are wallet phones.

Mobile Payments are not an emerging technology


The two parallel systems in Japan today are Edy and MobileSUICA. Edy stands for Euro, Dollar, Yen, expressing the hope for global success ― Intel Capital believes in this success and has invested in the company that runs Edy: BitWallet (backed by SONY). MobileSuica (also known as Felica) is a service for Osaifu Keitai mobile phones, first launched on 28 January 2006 by NTTDoCoMo and also offered by SoftBankMobile and Willcom. Initially used for commuters travelling on Japanese rail networks, today mobile ticketing payments are used by more than 90 percent of Japanese commuters.


Electronic money became popularised around 2007 in Japan, when two major retailers, Aeon and Seven & I, started their own versions of electronic money. The transactions by Aeon and Seven & I account for roughly 50% of all transactions in Japan still today.


Just to highlight how huge the e-money market is in Japan: Transaction volumes at Edy, the country’s biggest prepaid e-money issuer, nearly doubled in 2010 to 1.4 trillion yen (US $15 billion). To put that in perspective, PayPal did $4Bn in Mobile Payments in 2011, well behind just this one mobile payments scheme in Japan alone.


Between Edy and Suica, more than 84 million mobile contactless payments transactions take place every month[2], through around 450,000 merchants or outlets. Between retailers AEON, PASMO and NANACO (Seven & I) another 120 million mobile contactless payments are made every month, at another 300,000 merchants.


Yep, Mobile Payments are not an emerging trend or something to worry about in the future – they are mainstream and they are now.


[1] “In South Korea, All of Life is Mobile”, NYTimes May 2009,

[2] Source:


Lessons from Apple – great stores don't bring customers back

The new iPad just launched to the usual hype, anticipation and fanfare. Every time a new Apple product comes off the assembly line, it gets put under the biggest magnifying glass imaginable as crowds of onlookers parse the announcement with scholarly intensity, hoping to piece together a picture of what might emerge and what the implications for the world at large will be.

Apple calls their latest release “Resolutionary” in reference to the retina display capabilities of the screen embedded in the new iPad. The New iPad’s “Retina Display” has 1,000,000 More Pixels than a HDTV, and its resolution is so dense that it is beyond the capability of the human eye to recognize individual pixels. We’re reaching the theoretical limit of display resolution – higher resolutions won’t matter if we can’t see the detail.

But that’s not the interesting observance. Apple is the most valued company in the world right now, and it is in that position because it inherently understands consumer behavior in respect to product, brand interaction and purchasing behavior. There’s a lot of banks that would like to think if we turn all our branches into “Apple Stores” that customers will flock back to the branch. But that’s not what the Apple story is telling us.

Will “Apple Store” Branches Save us?

On the eve of 16th December, 2010, Citi opened a glamorous, high-tech branch in New York City’s Union Square. The 9,700 square foot branch was designed by Eight, Inc., the same firm of architects responsible for the unique design of the iconic Apple store. Although Citi actually launched their store concept in Singapore first, the New York store was almost positioned as the saviour of branch banking itself and the “Apple store” moniker was applied repeatedly to indicate it’s revolutionary nature. If you read some of the reports and commentary on Citi’s branch it was clear that many bankers believed that if you just got the branch format right, made the space more attractive for customers, that they’d storm the branch and all would be made right with the world.

But that’s not what happened. While Citi’s “store” was certainly innovative, there’s no evidence that there’s been any net gain in retail activity because of the evolution in branch design. However, some brands like Umpqua, Jyske (Danish) and Che Banca (Italy), playing on the same premise, have claimed some increased branch activity as a result of their evolved spaces. So what is the reality? Are innovative new branch layouts going to change behavior when it comes to banking?

You only need to look at Apple to answer that question.

Store First?

For many Apple newbies their first interaction with Apple products is through an Apple Store or a Apple retailer, but not always. The new iPad that was released yesterday is not yet available in-store, but already there are tens of thousands stacking up to buy the product through their online store. Pre-order activity for the iPad has already had an effect on the online store for Apple.

Checks by Computerworld through 4:15 p.m. ET from multiple locations in the U.S. found the Apple e-store either still sporting a “We’ll be back soon” banner, or if it did load in a browser, becoming unresponsive during the purchase process – Computerworld Article March 7th, 2012

What we know of Apple is that they don’t insist on you coming into a store to make a purchase, or start your relationship with their brand dependent on some process that requires a face-to-face registration for their first product. For the release of the iPad Apple had to actually restrict online customers to buying only two of the devices, due to overwhelming demand through the online store.

The argument often heard by bankers is that regulation forces physical face-to-face compliance processes on us, but even regulations don’t force chartered banks to insist on a face-to-face interaction to onboard or identify a customer. Like Apple, today’s behavior of consumers means we should be ambivalent to the channel a customer chooses.

For the sake of the argument though, let’s assume that the first interaction is in an Apple Store or in-branch. How do customers behave in their interactions with the Apple brand once they have purchased their first iPad, iPhone or Mac computer? Does the most excellent ‘store’ experience drive them back to the store repeatedly over time? No

Great “Stores” don’t bring customers back

Let’s look at the revenue story.

Show me the Money!

The average Apple Store makes approximately $34m in revenue annually, with $8.3m in operating income. However, if you examine the 10-K filing for Apple, revenue is split almost 50/50 between online (& device-based store) sales and their retail presence.

Since the Apple “App store” opened on July 10, 2008 Apple has booked close to $6 billion in revenue just on “Apps”. CyberMonday is used as the benchmark for US online and mobile retail sales, and figures show that iPhones and iPads account for a staggering 7-10% of all US online sales activity on those days.

What we know from all the data is this. Customer’s might start their relationship with Apple in-store, but they don’t have to, increasingly they’re choosing not to. Even if they do, 70-75% of the lifetime revenue from the average customer comes from sales online and that is increasing over time.

Customers simple won’t ever go back to the store to buy an App after they’ve bought an iPad or iPhone in-store.

There’s a lot about banking that are like Apps in our financial relationship. Credit limit upgrades, wire transfers, bill payment, CDs/Fixed Deposits, etc. In fact, once we’ve started our relationship with a bank as a customer, pretty much every product we engage with could be purchased just like an App through a better ‘store’ interface online.

Banks don’t sell well online because unlike Apple, we think that the primary store customers want to shop at is our ‘branch’ and when they come to internet banking, we often don’t even integrate sales into that ‘transactional’ platform. But the behavior of Apple customers shows that even with the best benchmark retail presence in the world, customers don’t come back time and time again to your store or even chose the store first. Once they are connected with your brand, they buy your product and utility wherever is most convenient, and that isn’t at the store or branch.

The big question is, how many branches can you afford to support if customers only visit them the first time out and do the rest online?

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.

Would SOPA/PIPA kill Internet Banking?

The PROTECT IP Act (Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act of 2011), is a proposed law with the stated goal of giving the US government and copyright holders additional tools to curb access to “rogue websites dedicated to infringing or counterfeit goods”, especially those registered outside the U.S. Both of these “Acts” would have massive impact globally, and could create absolute chaos. The PROTECT IP Act is a re-write of the Combating Online Infringement and Counterfeits Act which failed to pass in 2010.

SOPA builds on PIPA. Known as the Stop Online Piracy Act or SOPA, is a bill that was introduced in the United States House of Representatives on October 26, 2011, by House Judiciary Committee Chair Representative Lamar S. Smith and a bipartisan group of 12 co-sponsors. The bill, if made law, would expand the ability of U.S. law enforcement and copyright holders to fight online trafficking in copyrighted intellectual property and counterfeit goods.

As proposed, SOPA would allow the U.S. Government the power to block any website from both a DNS Lookup, and eliminate it from search engine results – without needing any court order. Due to the vague nature of the bill being passed through, this could create significant chaos. So what about for banks? Would SOPA/PIPA impact banks at all? Is it in the interest of banks to support or push back against these bills?

Enforcement process

The key problem with SOPA is around enforcement actions available to copyright holders and the US Department of Justice (DoJ). The enforcement actions are unilateral, brutal and extreme. Violators face immediate action against their site and/or business, and up to 5 years in jail for infringement. The fact that you might be in another country and not subject to US law, doesn’t really factor in this process.

If a violation is lodged by a copyright holder, or as SOPA defines it “the owner or operator of such Internet site is facilitating the commission of [copyright infringement]”, the site in question can be blocked at the DNS (Domain Name Server) level and removed from all websites. Payment providers (section (b)(1)) and ad networks ((b)(2)) are required, upon receiving a claim against a site by a copyright holder (section (4)(A)(i)), to cut off all services to the accused site within five days, unless they receive a counter-notification from the operator of the accused site. Note that there is no requirement that the accused be actually notified of the accusation, and thus, they would have no opportunity to provide a counter-notice. Probably the first you’d know about it is when your email stops working, or customers start calling letting you know your site is down.

The only way to provide a counter-notice to a claim or breach is to agree to submit to U.S. jurisdiction (section (5)(A)(ii)) if you are a foreigner, and to state under penalty of perjury that your product does not fit the definition of an “Internet site…dedicated to theft of U.S. property.”

The definition of SOPA around offensive ‘copyright violation’ behavior is as follows:

An `Internet site is dedicated to theft of U.S. property’ if [a portion of the site is US-directed] and is used by users within the United States and is primarily designed or operated for the purpose of offering services in a manner that enables or facilitates [copyright violation or circumvention of copyright protection measures].

This means that YouTube, Facebook, Wikipedia, Gmail, Dropbox and millions of other sites would be “Internet sites…dedicated to theft of U.S. property,” under SOPA’s definition. As far as being ‘US-directed’, any contact form that enables a US consumer to enter their details, would be in violation from this perspective.

There’s an excellent review of much of these specifics around the law and how it ties in with enforcement action on Mashable.

Scenarios to think about?

So what does this mean? To illustrate simply, lets say you post a video of your baby dancing to Beyonce’s new song, filming your kids song and dance routine of their favorite bands song, you post a review of a restaurant or show a photo of a new gadget you’ve purchased. The site you hosted it on would be banned from search engines, advertising companies would not be able to do business with that company and internet providers will be forced to block their customers from accessing those sites and you the uploader would be fined and sentenced to jail for 5 years on a 1st offense.

What about in respect to banks, banking content and possible SOPA violations?

Here’s a few banking specific scenarios that I identified from SOPA that could be problematic for banks:

  • A bank promotes an iPad or iPhone giveaway as part of an offer – unless you had Apple’s permission, you’d be in violation
  • The use of an image of a car or car brand in a motor vehicle insurance advertisement
  • Credit Card Loyalty programs that promote rewards using products would be in direct violation of SOPA
  • A contact form that allows a US citizen to apply for a pre-paid Visa Debit Card on a foreign website before they travel overseas on a trip.

Let me illustrate how ridiculous this is.

HSBC in Hong Kong offers a program of rewards for cardholders they call “RewardCash“. Their RewardCash e-Shop shows products like a Mophie Juice Pack, a Panasonic Rechargeable Shaver, Targus USB powered Travel Speakers, Victorinox 22″ Carry-on luggage, etc. Let’s say that one of those companies was trawling the web and found ‘image’ violations of their product, it could be interpreted that HSBC was using credit card ‘rewards’, miles or points as an alternative currency to sell those products and circumvent US distribution chains, and a complaint could be lodged with the Department of Justice. A similar complaint could be lodged if a brand owner feared fake products were being given away from this site. They wouldn’t need proof, just the ‘threat’ of potential impact to a US IP owner.

5 days later, (and other domains) would be removed from the DNS databases in the US and around the world, becoming totally inaccesible. While HSBC would have the right of recourse, the damage would be massive and very, very expensive. Internet banking would be down. The main website would be down. Staff email would be down.

Now, could this scenario really happen? It’s unlikely, but the point is that SOPA would allow such an action to be taken.

Imagine how much fun legal and compliance would have with this legislation?

A disaster

All in all, SOPA simply is a disaster for the future of business, free commerce and innovation. The Whitehouse Administration cautioned in a blog post last week that it would not support any bill that did not “guard against the risk of online censorship of lawful activity and must not inhibit innovation by our dynamic businesses large and small.” While this is not a direct condemnation of the proposed act, it seems probably that President Obama would veto this bill if it was passed into law – and he’d be right to do so.

The MPAA and RIAA lobby groups that have driven this law to Capitol Hill, should not be in a position where foreign banks could be brought to their knees by nonsensical legislation. This is very one-sided legislation.

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