New Year 2015 blog post – visible trends in financial services
I have long given up on predictions for banking. The evolution of financial services has been nothing like as expected over the 19 year history since online banking began. So here is a rather loose collection of observable trends that directly or indirectly impact banks, most strengthenining banks’ positions and some requiring adjustment.
- the myth that is dis-aggregation of financial services as large banks move to become financial utilities
- the myth that is PFM is becoming fully exposed
- the near future of Banking as a business model
Discussion: what is a bank?
Banks do two things; they hold depositors money and they lend money. They try to do the former for less than the latter thus earning Net Interest Income or spread. During the ever lower interest environment since the 90’s, retail banks reached for alternative income sources by charging fees (transaction fees, account fees, Mutual Fund fees). These non interest fees have become an essential part of banking profits, supported by rapid growth in spread income. Any drop in either component represents the greatest fear of bankers.
- dis-aggregation of financial services
Since the the evolution of internet banking, we have first followed for innovation from banks. Failing that we followed for innovation from startups or risk taking banks that would take advantage of the benefits internet brought.
This did not play out as expected. First off banks were taken aback by the fallacy of internet banking being cheaper to offer. Internet was in fact a net new channel, bringing additional costs. And worse, it introduced costs throughout the entire bank infrastructure that were required to bring financial services to that confoundingly difficult single internet page with the entire customer account set, all in one place.
It took this long, but many banks are getting there with complex middleware contruscted to insulate legacy systems, or alternatively new modern tiered systems designed to offer internet at least as a parallel offerring to branches. Few to my knowledge are going head on to internet first as an offering, although Bendigo in Australia going all in with a proper internet app framework to build out their online banking.
While Banks’ umderwent this infrastructure transition, startups such as Uber, Paypal, Amazon, and to a certain extent the rise of debit (particularly touchless debit) have moved payments to the background and the experience being purchased to the foreground. However all of this is not so startlingly novel, and banks remain satisfied to continue those payment activities along their traditional system, and see a continued use of credit cards.
There are other startups including Stripe, and Rypple that are doing innovative things in payments, making adoption of payment acquirers easier but still riding the traditional rails of banking infrastructure (credit card, interchange, SWIFT).
Net impact on Banks business model is nominal. To a fair extent banks are becoming utilities with consumers consuming banking services through alternative front ends. Meantime Banks see greater transaction activity along their traditional transaction systems.
This does raise an interesting question in terms of how banks advertise and offer their services in future, and banking becomes more opaque. Will a bank advertise or sell their products within an Uber or an Amazon?
2. the myth that is PFM is becoming fully exposed
It is safe to say this parrot is dead. In pre online banking days, Quicken and Microsoft Money were the pfm’s of the day. Usage was limited to a hard core group of enthusiasts that accounted for less than 10% of the market. Spreadsheets or nothing at all were the most common. Tagging and qualifying the transaction activity in the bank account was just too much work.
I did a quick analysis of Finovate presenters in 2009 that showed 35% were in the pfm space highlighting the hype of that space.
With the advent of enough data, some banks have taken on the challenge of offerring budgetting and planning services based on automated solutions. Wells and RBC are two that spring to mind as early proponents. RBC offer an automated graph and analysis of my spending patterns. They have done extensive back end integration work that is obvious watching my debit activity. On the day of purchase a debti transaction simply indicates a debit. Within 24 hours that reference is changed to a clear name of the merchant. They must be performing some kind of batch process that matches their debit activity with bank accounts. It is incredibly useful, and something they have done quietly. This is the stuff that loyalty is made of, and highlights where the pfm market is going.
3. the near future of Banking as a business model
So what of the future of Banking as a business model. In 2007/8 dire predictions abounded that the model was flawed and banks would break up. In fact banks became larger.
As for this blog, I predicted a future with banks separated between financial utilities sitting in the background offering payment services, and a smaller group of risk takers. That was 2009, and I was partially correct. Not much has occurred in the area of risk taking, but some signs are evident with Banks purchasing development shops, and startups. TD has aligned with Moven. BBVA with Simple. Interesting but nothing earth shattering there yet.
I expect a big trend to be the beginning of real branch elimination in 2015. We have seen Lloyds as an early starter on that.
So far most startups then are enhancing the banks’ business model.
As always contrary thoughts welcome.