The Great Unwinding | part 3 of 3: The state of innovation in financial services
The first two parts of this series are pretty gloomy. I remain convinced they are directionally accurate. I appreciate that being so specific about the next 12 years does not guarantee accuracy, and in fact guarantees there will be surprises that are not even contemplated. However the core themes derived in the first two parts have sufficient momentum and credibility to form the basis of the environment for a strategic scan.
The impacts on banks will be seen through three broad strategic drivers:
- Interventionist regulatory framework: all of the scenarios see new regulation.
- Back to basics banking: survivors will reorient their business around client needs and core competencies.
- Restructuring in alternative funders: hedge funds and that related industry will see structural changes – this may or may not have direct impact on banking, but cannot be ruled out.
… however banks and financial services will be offerred through two broad service models:
- Financial utilities – significant operating restrictions in light of implicit and explicit government guarantees underpinning the business
- Risk takers – not clearly defined as yet – will be dependent on regulation applicability
These models are at opposite ends of the spectrum. Where it gets interesting to to apply to real world banks. Barclays, Lloyds, Bank of America, Wells Fargo to name four. Will each of those be utilities or risk takers based on what we have seen occur to date? Did Wells really believe they could receive government money and arrange an employee boondoggle? Did Bank of America really think they could move executive bonuses forward and buy carpets close to $100K. The costs (bonuses and jets) and politics (renovations and moving dates) are simply too compelling to ignore. Banks cannot operate in a vacuum anymore.
My context here is simply an evaluation of the impact on financial services offerrings, and whether we can expect more or less innovation, and from whom with the above as context.
Yesterday’s piece within managing during a downturn in the FT rings true but will this come from banks:
More important, recessions often accelerate rather than decelerate underlying trends in consumer behaviour. Take use of the internet. With consumers spending more time at home rather than going out, internet use promises to increase. At the same time, consumers anxious about current and future job opportunities are more keen than ever to develop the networks that can help them with advice and job leads. Look for professional network sites such as LinkedIn to do well and for social networking sites such as Facebook to reach out more to professionals.
Current state of innovation in financial services
Jim Bruene at netbanker has the Finovate 2009 conference coming up this spring. Jim is quite plugged in to the current state of financial services innovation, and his blog covers that well. The conference is a paid participation model so the attendees are from that group and offer a good summary of the current state of those that believe they are innovating financial services. I pasted the current attendee list below with links to each site. I took that list and evaluated each as to which market and which category they fell. The results were listed here and summarised as follows:
- 37 participants in Finovate 2009
- 18 (50%) are in personal finances
- 2 are in mobile
- 4 are in social financial services – i.e. providing otherwise typical financial services but without a bank as intermediary.
- others spread fairly equally over payments, lending/ investing, lifestyle, and fraud
I left that review with two conclusions:
- majority of innovation is either in support of existing financial services
- There are too many participants in the financial planning space
- mobile is under represented
Relevance to Bankwatch:
I did not know what to expect before this review of the current state of innovation and was initially hesitant to form a conclusion. Let me say I wish all these startups well and it is unfair to evaluate them in the context of the global financial crisis, yet that is what I am doing.
The level of innovation is lower than I expected relative to financial system change. Most innovations are in suport of existing financial services. Since 1997 it has been obvious that the next stage for online banking would be financial planning and budgeting – taking data, forming conclusions, and offerring help. Yet few have developed a better mousetrap in this space. This category fits well within the current financial system model.
Wesabe comes closest to novelty by driving a new model aggregating amalgamated yet abstracted customer data and using it to offer insight to members. This use of data crosses proprietary bank lines and it is incomprehensible for a bank to offer this innovation.
The other category that promises change is social lending / investment. This category offers the potential for borrowing and lending with no bank between the lender and borrower. This model is innovative. [disclosure: I am involved as CTO with CommunityLend]
In conclusion we have 5 out of 37 that offer the promise of systemic change to financial services. Perhaps 15% is good.
There are no banks in the innovation category. This is significant because the list is developed based on work that predated the crisis. If banks did not offer leadership and innovation before the crisis, the constraints in the new system suggest that true innovation will arise from outside banks’.
Finovate Startup 2009 lineup (as of 2 Feb 2009):
- Cooler Inc.
- Credit Karma
- Green Sherpa
- Lending Club
- Pertuity Direct
- Portfolio Monkey
- Receivables Exchange
- Silver Tail Systems
- Transparent Financial Services