The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘Aggregation

Where will the innovation come from in financial services?


A central question for financial services is this:  “Where will the innovation come from in financial services?”

I read this piece from Dave over at Digital Money Forum, and it highlights a central problem that traditional financial services falls into.

The 50 year plan : Digital Money forum

That sounds like the Greek restaurant will have to give a British cardholder a couple of pages of A4 and make sure that the customers reads them before they punch in their PIN.

Anyway, the point is that for banks, the PSD comes at an interesting time when transaction banking is becoming more central to strategy. The threats from both new entrants and substitutes are, according to Bob (and I agree with him), high. In these circumstances, regulation is turning from a moat that competitors cannot cross into a millstone around the incumbents necks.

The problem is in the complication and diversification of businesses contained within a typical bank.  The problems are surmountable, but first they must be recognised.  The issues arise in part from interpretaion of regulation, and in part from the diverse nature of modern large banks.

Relevance to Bankwatch:

Regulation:

It goes without saying that there is host of regulation that must be complied with.  As the events have occurred over the last two years, regulation has become more of a factor in oversight of banks.   In my three part piece earlier this year, The Great Unwinding, (title refers to unwinding of debt and deleveraging of households and institutions) the point was that as the economic pie decreases is size, and at the same time the role of government increases that the effect will be to produce two types of banks:

  1. Financial utilities; much as you turn on your tap for water, or plug into the wall for electricity, you will plug into these banks for basic services.  Nothing new, nothing extreme, and nothing innovative, unless the government tells them to do it and even then that won’t work – refer back to Daves piece above and SEPA.
  2. Innovators: while in the minority, this group will be comprised of those who keep their heads above the trees and see that rather than a time of crisis, this is a time of opportunity;  opportunity defined as a new market that is diametrically opposed to the market of the last 10 years for banks.

Bank bureaucracy:

Banks have always been bureaucratic but the last 15 years has seen bureacracy become triumphant in many institutions.  It began to be a problem in the mid 90’s when this new fangled thing called internet required that the entire bank be properly represented at the point of a click.  Having spent 100’s of years operating independently, to ask product managers to talk with other product managers, and in the same room as electronic channel managers required new levels of collegialism that was never requested before.  There were no rules nor common norms that could be held up as principles to guide the discussion.

Everyone at the table would claim to be ‘customer centric’ and representing their customer.  Other approaches would say ‘the bank’ owns the customer, but then who represents ‘the bank’ in that conversation – the Chairman?

It also happened that we also saw a rise in regulation for privacy, security, complaint handling, ecommerce laws all of which brought even more partners to the above table.  The result takes us to Daves somewhat humourous, but too close to the truth point above about having customers complete a two page document prior to punching in their PIN.

Market differences:

So in a climate of crisis and regulation, it will be easy for the majority to reduce themselves to financial utilities.  It comes naturally to large organisations, who have not solved the riddles of focus and simplicity.

The innovators on the other hand will see the opportunity because they can see through the morass of problems and zero in on that opportunity with laser like focus.

I blogged earlier about the changes in the economy, and while that post applied to the US context, this equally applies to all western economies, including Canada, UK, France, Germany, and Spain as obvious examples.

These macro factors will play a large role in US banks and credit unions strategy design for the next 5 years.

  1. no consumer purchase driven economy in US – with the implication of extended higher Government spending for some time to counter
  2. US consumers save (increasing savings accounts and paying down debt)

When we think about banking over the last 10 years, the predominant consumer products that saw innovation have been borrowing products.  Lines of Credit, Mortgages, Credit Cards and Consumer loans have been pre-eminent.  If we read and think carefully about Timothy Geithners comments above, and I share his view, the nature of banking products and services that see growth for the next 10 years will be different.

Economic recovery does not mean a return to things as they were.

The dominant products will shift to becoming investment accounts, savings accounts, and money management services.

As consumers seek to save (economic terminology for hoarding cash, or repaying debt) they will be watching every penny.

As money is saved or spending is reviewed the requirement for real time information is added to the mix.  Questions will be asked, such as;  ‘can I afford this purchase this month’  or ‘what if I waited till next month’, or ‘how much have I saved this month’ or ‘how much have my total credit card balances reduced’.  This introduces the need for new payments services, and that are adding value by connection to money management services such as Wesabe, or Wells Fargo spending analysis service.

These questions should drive new and innovative services that banks have not been accustomed to creating.  It requires new thinking and re-alignment of strategic resources.  It is much easier for new entrants to banking to start small and simple in this new environment.  A mix of new entrants and smart existing players will be the innovators, and the winners.

Written by Colin Henderson

June 1, 2009 at 13:04

All banks have the same strategy | what happened to the Starbucks strategy?


It was refreshing to read this piece, and takes us exactly where innovation in financial services ought to be going – the new (old) grand ideas.

Starbucks should start banking | FT

What if Starbucks opened an online-only retail bank offering competitive deposit rates and a modest range of loans and mortgages? It could do that by partnering with a finance company such as ING, which has the appropriate banking licences.

All it would need to do is install ATM machines in its outlets, which would involve investing some money but would allow it to get more out of its existing branches.

National supermarkets in the UK, such as Sainsbury and Tesco, have opened retail banks and placed ATM machines in their branches, but there is no national grocery chain in the US with a comparable reach. Even Wal-Mart lacks outlets on most urban high streets.

I recall the brainstorming sessions in the 90’s at the bank, where the discussion about competition arose not from other banks but from:

  • Starbucks levering their distribution and cards as a bank
  • ebay or Amazon offerring a credit card
  • internet only banks – ING was on the horizon – mbanx and Wingspan already out there
  • whether to join the S1 online banking commoditised platform
  • offer an All in One account that pulled together lending and deposits into one account
  • how to deal with the role of aggregation- offer it, join it, or ignore it
  • bill presentment – same idea – offer, join or ignore
  • shift in business model from generalist to:
    • product (manufacturer) – offer loans and deposts through others channels
    • distribution (channel) – sell products & services of others – Open Finance (Forrester)
    • segmentation (customer type)  – focus on a niche market, although most interpreted as the generalist, all things to all market which is where most banks ended

Relevance to Bankwatch:

The problem today is that Banks are on strategy defined 6 – 8 years ago to bricks and clicks, focussed on customer retention and wallet growth.  Customer Relationship Management (CRM) became the strategy de jour.  Who would claim that has worked?  Seibel disappeared inside Oracle for a reason.

Banks are all on the same strategy, focussed on mortgage as the entree, and upsell with other services later.

There is nothing out there that aims at shifting the balance of share of market in a substantial way.  This is not about acquisition or mergers – we have done that, and “too big too fail” is too fixated in everyone’s radar now, or until capitalisation is fixed, in any event.

No, this is about business model shifts … shifts that would have a target of:

  • double digit percentage shift in share of payments,
  • extraction of share of deposits and payments from an existing industry (the Starbucks example),
  • exponential elimination of costs relative to competition
  • focus on what your are good at and eliminate the stuff you are not good at

Business models –

Mr Bank Chairman …  what is your business model, and how is it different than the competition?

Supplementary question –

Who is your competition?  Do you lost sleep over Citibank and Wells, or Tempo and Wesabe?  Does your answer worry you?

PS …  as I finish this post the most telling thing is something I have become acutely aware of.  The blog categories I set up 5 years ago no longer apply, until I do a retrospective post such as this.  Either those were really bad ideas, or ideas yet to come.

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