The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘Innovation

The true meaning of innovation in financial services lies in the plumbing, not UI


This piece on internet and evolution of financial services has the best quote I have seen for some time.

“these companies have merely built nice UI’s to Wall Street”

How To Disrupt Wall Street | The Business Insider

As I see it, these companies have merely built nice UI’s to Wall Street: Mint connects to your banks and Square to Visa and Mastercard and the bank that issued the credit card. If people at farmers’ markets use credit cards instead of cash, that means more money for Wall Street, not less.

Brilliant. I take no issue with the likes of Mint, and Square which are nice new innovations. which may well result in big changes later. However they are hardly game changing today. Game changing would mean that in 20 years time we might see future headlines such as:

  • Headlines – 2030
  • bank branches are no longer ….
  • banks have largely been replaced by ….
  • customers obtain financial services today from ….
  • Hedge funds have replaced …..
  • A new type of investment fund has …..

In order for such headlines to appear new sets of new companies will be needed, but more importantly companies that are based on dramatic shifts and simplicity in how money moves around. Money moves today amongst people and banks in a certain way today. This is the plumbing of banking. Payments networks, clearing systems and ATM networks are how money moves around. Mint for example does nothing to change that. In fact arguably Mint makes banks stronger by providing new reasons to stay with the current bank because the functionality Mint offers is based on access to existing plumbing.

The financial systems that comprise the plumbing and the operators who sit over the plumbing such as Banks, aggregators (eg Yodlee, Cashedge), Card companies (eg Visa, MasterCard), all serve to actually increase the complexity and also the probably, the cost of moving money around. More players means more competition, and it also means more aggregate costs in the system. For consumers they must beware new sets of fees which in total increase the overall costs of their financial services.

Let us not forget that one of the causes of the financial crisis of 2008 was the lack of transparency embedded in the financial products that served the securitization markets. Those markets remain, and the methodologies have yet to be re-invented. Government regulation will not fix that problem.

For me true innovation will only occur when plumbing changes. Despite the recession the world is awash in cash, seeking better returns, yet the ‘system’ generates very very low real returns on cash investments when compared to the interest rates which are paid by people on loans, credit cards and to a lessor extent mortgages. The interest rate differential between that paid, and that earned is being eaten up by more and more players. This has resulted in a shift to more and more fees because the interest spreads just don’t offer enough return to fund the ‘system’. This is a snowball effect that can never be good for people. Forget about bank bonuses. Those are asymptomatic of an inefficient system that is driven by driving people harder and paying them with large bonuses to make an inefficient system work by creating ways to hide the inefficiency – lipstick on a pig. Bonuses are just one element of cost in an inefficient system.

Thus true innovation can only occur when we see elements of plumbing removed, costs removed, and money able to move between people with less steps and costs thus eliminated. Included in the plumbing are banks and their systems, payment networks and their systems, card providers and their systems, and unfortunately this includes the new UI providers referred to in the article above.

When we see players changing plumbing such that existing systems are bypassed, and made no longer relevant to a transaction, we will have innovation. When that happens players will change and eventually be eliminated, and those headlines may begin to appear.

Written by Colin Henderson

January 23, 2010 at 20:18

The coming media crisis and parallels with the financial crisis


A general thread that has been building for me for some years now is highlighted in a few things I have seen recently. The thread is my hatred of advertising and in particular online advertising. For me it lies in the same category as junk (paper) mail except worse. I can simply throw paper junk mail out as one package, so it is not intrusive. Online advertising is horribly intrusive because it is pervasive. I use lots of things to ensure my online experience is minimally interrupted by ads

In 2004 people were asking about blog business models. Now it is social network business models. I have suggested other ways to deal with business models, but the mob continues to aim directly at advertising as the answer. It will pollute the web, and result in the opposite result than what is desired. It will not bring sustainability for them using advertising.

So what happened this week.

  • twitter volumes are already dropping. Pick any topical topic and search it on twitter – result 80% of the tweets are re-tweets of the topic. Its a gigantic echo chamber. In fact the next question – how many of those re-tweets were someone with a vested interest, a professional marketer, or a PR company? The theoretical value of wisdom of crowds does not allow for gaming the system. The black swan of twitter search.
  • the volume of requests to me at this blog for linkbacks, blogroll links and outright requests for ads is increasing significantly. That will never happen btw. However it is indicative of the desire for ‘social media’ results
  • A good friend who despite my recommendations still uses hotmail (now windows live). This persons entire contact list and archive of emails were deleted and it turns out this person not alone. Some kind of scripting virus inside hotmail launched by making the wrong click and signing up for something let the virus in. The clue was emails to all the contacts notifying my friend was happy with some TV or the like. Needless to say my friend is now using gmail exclusively but its a bitter lesson.
  • techcrunch reported on the real evil of ad networks online and the significant money being made. Its a long post, but the key is that no-one is generating any real value here. Individuals are getting rich and that is all.

So what is the point of these seemingly unrelated observations especially as I am a devout proponent of the value of internet. What I am against is traditional interruption advertising coming online. It pollutes the medium and hinders the genuine creation of new and valid business models.

Today I read Umairs post at Harvard and that solidified it all for me (Umair does that). He points to the coming online crisis that is the online version of the subprime crisis. Readers of this blog get the sub prime crisis. The coming online crisis is one of trust, and realisation that online activities require security and protection yet something more which is still to be invented – control. It will be a crisis and it will be a broad based internet crisis of confidence. The result will be serious and cause serious grief for banks and others who have come to rely on online for servicing.

The parallels with the financial crisis are interesting. The financial system was getting better and better at recycling money and the convoluted networks that were built lost sight of the origin of the credit instrument, and the underlying risk. Causes were lack of transparency, shadow markets, rapid expansion, and mis-allocation of risk amongst others. In the case of the online advertising market, there are similar attributes. Transparency is non-existent in most cases, because there is no way to know who is behind those ads. Shadow markets and rapid expansion – ditto. Mis-allocation is interesting. I avoid online ads because they are interruptive. At a deeper level, they are mis-allocation of resources away from user experience and towards the requirements of a stupid ad server that is busily collecting data on you. The value is highly one-sided – worse the server is gather data that may or may not be of any value. Internet is simply clicks – do clicks imply desire, need and future purchase patterns?

Relevance to Bankwatch:
Smart banks and others will look at the embedded value in the customer base they have and define models that add value to those people, not spam them. What is known about your customer base, and what do your customers actually want. Traditional advertising models assumes customer needs – internet models will (I believe) enjoin the customer to participate in the definition of what they need and in return protect them (the customer) from spam advertising. One example is the promise of VRM. But it is only one – others will be developed, and will be supported by powerful authentication tools.

Innovation is another loser in this coming crisis, or as Umair notes unnovation. In advertising land, innovation is all about finding ways to get inside peoples click patterns and drive ad revenue. There is not value created for the majority of consumers (90% + who do not click), nor for merchants who actually desire long term client loyalty.

This has turned out to be a negative post, but really it is intended to provoke thinking beyond online advertising and ad servers. Which innovations will align customer advocates and merchants in a genuine and trusted manner?

Written by Colin Henderson

November 12, 2009 at 21:57

You know its bad when … the government is more innovative than your Bank


This post from James following his first week at the DWP (Department of Works and Pensions, and hosts of direct.gov).

DWP, is running an innovation experiment where they allow citizens to put their own applications on top of government data. Yes, that’s right: an API for the government.Show me a bank with API. You can’t, because there isn’t one. I have to go to a third party like Wesabe, who basically have to suck data out of banks without their permission, to get one. I think it is early days for what Direct.Gov is doing, but you can see the potential. More particularly, the fact of this experiments existence tell you lots about the sorts of things it is possible to do in the public sector.

Strange days indeed, and something that ought to worry bankers.

Written by Colin Henderson

September 1, 2009 at 13:08

Posted in Innovation

Tagged with ,

A market test alternative for credit cards


This is a variation on the theme I cover periodically called Vendor Relationship Management (VRM).

The variation here is that the Vendor must place the consumers product up for bif from competition when they are considering changing the terms, such as interest rates.  The consumer would then have the choice of accepting the change, or accepting one of bidders. (HT Payments News)

A Market Test for Credit Cards

We have an alternative solution, employing a market test of a proposed change. At the time when the lender proposes a unilateral change, it would be required to put the existing account balance up for auction on a LendingTree-like service that would allow other credit card issuers to bid for a chance to issue a new card and take over the existing balance.

Borrowers wouldn’t be forced to switch to the auction winner. They’d just be given the option. When an existing credit card issuer proposes a rate increase, it would be required to pass on the terms of the winning bid and a comparison with its own terms, and the borrower would decide whether he wanted to make the switch.

Written by Colin Henderson

July 11, 2009 at 14:46

DOCOMO to Launch Mobile Remittance Service


Banks continue to be challenged by disintermediation from telco’s and here is another example, this time in Japan.  The service will launch 21st July, and allow sending up to $200 with only the payee’s phone number being required.

An interesting tweak is the ability to have the money deposited with DOCOMO under the guise of a credit to your account, however this is deposit taking by another name.

DOCOMO to launch mobile payments service

Customers of DOCOMO’s i-mode™ mobile Internet service on the FOMA™ 3G network will be able to remit up to 20,000 yen (about 208 U.S. dollars) per transfer, basically just by inputting the payee’s mobile phone number. The payee receives a mail notification via their DOCOMO mobile phone and is given the option of depositing the money in a domestic bank account or having the amount credited to their monthly DOCOMO phone bill. The payee can receive remittances totaling up to 200,000 yen (about 2,080 U.S. dollars) per month.

new090702_2

It is a lucrative service with charges to payor and payee.

The charges per payment (including consumption tax) will be 105 yen for the payer and 65 yen for the payee.

Researched by Nobuyo Henderson

Written by Colin Henderson

July 4, 2009 at 17:15

BBVA pays staff to take 5 years off


A very unusual and novel cost cutting measure from BBVA, the Spanish bank.  The 70% cost reduction, with a guaranteed pool of employees after the period is up is certainly a new approach.
vacation

Can’t help but think there will be unintended consequences after the 5 years are up, built certainly the immediate consequences will be more palatable than normal layoffs, which generate acrimony, as well as an expense one time charge.  This approach will drive accountants nuts.

It will allow the bank to make future hiring plans, and attrition management with some knowledge of the future.

Bank pays staff to take five years off | Daily Telegraph

Employees of BBVA, Spain’s second biggest bank, are being offered 30 per cent of their usual salary in return for staying away from work for between three and five years.

Anyone signing up to the scheme is guaranteed a job when their extended leave comes to an end. They will also have their health care costs covered for the length of their sabbatical.

Researched by Nobuyo Henderson

Written by Colin Henderson

June 3, 2009 at 23:50

Posted in Innovation

Tagged with ,

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

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