The last two days covered social media and social networks, and their relevance to banks.
The conclusion is that banks cannot ignore these developments, and need to use these communication capabilities to engage their audience in a conversation that advises, supports and educates potential customers in their financial capabilities.
This advice, support and education can build into a relationship and a trust that might generate future account openings, but that is not the primary intention. The primary intention is to build trust. After all, banks have lost so much trust this year, this must be a strong reason for social networks and media to be used as a critical platform for future business.
For today and tomorrow, let’s look at going beyond advice and trust and see what new business models are developing around these themes.
From a social networking view, the most popular developments are around investment networks, such as Seeking Alpha, Social Picks, and the re-energised Motley Fool.
These are social networks for bankers and day traders seeking investment tips, and serve an interesting function in aggregating the views of the populous. This can therefore provide tips for where to avoid (where they’re investing) and where to invest (where they’re not investing).
Above this level, the main areas of financial activities are focused around lending, saving, budgeting and managing money.
In the latter two categories, services such as Mint and Wesabe have staked a strong claim to fame.
These services allow you to create a structured analysis of your saving and spending habits, and they proactively analyse your habits to help you manage them better. They will alert you when you’re breaking your deposit balance rules, such as having too much or too little cash in your account. Similarly, they will tell you where you can find a better deal and offers suited to your financial habits.
How they do this is very similar to Amazon. Just as Amazon compares your buying habits every time you buy a book, CD or game, in order to recommend other books, CDs and games, Mint and Wesabe analyse all the people like you and recommend financial products, services and firms that might suit you better, based upon your profile and the profile of people like you.
This leads to the best banking service I’ve seen launched this year, which is Tu Cuentas from BBVA.
Tu Cuentas means “You Count” in English, and provides Mint and Wesabe style functionality, but from a bank.
BBVA will compare your profile with all the other BBVA customers, in order to give you alerts and offers with great precision, but it goes a lot further than this through aggregation services, budgeting services, investment services and alerts. It allows you to access Tu Cuentas services using Blackberry, mobile and internet platforms. It even allows you to use bits of Tu Cuentas services as widgets, which you can pick up and drop into any other web applications. So I could drop my bank balance and alerts on my Google personalised home page.
Fantastic.
These are all social banking services focused upon better financial management using digitally socialised tools.
Then we have new business models, such as social lending.
Social lending first appeared in March 2005, when the UK’s Zopa service was launched.
Since then, Zopa style lending services have appeared everywhere, from Smava in Germany to ppdai in China. In fact, in these times of the credit crunch, where people can no longer get access to funds from banks, social lending has become indispensible.
The basic premise of social lending is to create an eBay style platform for savers and borrowers.
The savers’ savings fund the borrowers’ borrowings, just like a bank, but the difference is that these businesses offer no financial management themselves. They are just a platform to connect savers who want a higher return on their savings, and borrowers who want a lower interest rate on their loans. These platforms just connect them and claim that there is no financial management taking place.
Zopa, Smava, ppdai and related firms are therefore like eBay. eBay makes nothing but just connects buyers and sellers and, in the same way, these firms purely connect savers and borrowers. This is why Zopa falls outside the remit of the FSA, although they are regulated now as a result of offering insurance on their loans.
They also win out because they are small and nimble, with few staff or overheads which means that they can offer a service with minimal spread on the difference between borrowing and saving rates. As a result, they undercut bank rates significantly with a 0.5 percent spread.
This is why social lending works.
It is now without issues however. For example, this is why the US Government is trying to shut some of them down.
The problem with the service, as cited by the SEC, is that loans are not being repaid and this is the challenge for these sites: to get enough liquidity to be able to cover all the borrowings required, and to manage the risk of those borrowings.
Many of the social lending sites cover these risks by using Experian, Equifax and other credit rating agencies, or through the offer of insurances, but any squeeze on funding strains the social lending business model.
That is why there are other things happening of interest to add to the social lending concepts, such as SmartyPig. SmartyPig takes the social lending model and applies it to savings.
The way it works is that you setup an account and create a savings goal, such as saving for a car or a college education or to pay off a mortgage. As you save towards your goals, you tell the world by placing the SmartyPig widget on your social network page, blog or website. Lo and behold, all your friends and family can contribute towards your savings goals.
This is very friendly and very family oriented.
As a result, SmartyPig had customers in all 50 states within three months of launch in the USA are now partnering with other banks, such as ANZ, to launch a white labelled service in Australia.
And these social models are not restricted to just the retail markets, although I guess we would call them Web 2.0 applications in the investment markets as there's nothing social about those markets.
For example, in the investment and trading space, you could say that Europe's new stock exchanges - Chi-x, Turquoise, BATS et al - are social exchanges. After all, they are new exchanges trading at minimal spreads by using the latest internet technologies to offer trading platforms that have virtually zero overheads.
It’s not social, but it’s very similar to the structures of Zopa and similar companies in concept.
There’s even an eBay for traders out there today. It’s called Bidroute.
There are many other examples of new social style financial and banking offers, and is an area that warrants almost a book of words to articulate.
For the brevity of today, I contend that the world of social banking is developing fast. There are many firms out there building social models for finance, ranging from social advice to social lending and saving to social trading and dealing.
Every aspect of social media and social networking can be applied effectively to banking models.
The difference in this world is one golden rule.
You are offering a platform for lower cost banking and trading for those people who like to serve themselves by participating. They participate because they believe it offers better value and service.
These new models are not pushing a product to customers. They are offering a platform to participants.
This golden rules is probably the hardest lesson for a bank, and will mean that most will follow or acquire these new business models, rather than invent or create them.
That’s my guess anyway.
More on these themes tomorrow as we explore social money.
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