The Financial Services Club is a unique service designed for Senior Executives and Decision Makers from any firm interested in understanding and planning strategies for the future of banking and finance.
I was upset to be unable to join the recent debate in New York on digital banking. The debate was framed around the theme: "This House Believes Fintech Will Eat The Bankers Lunch", and I was going to oppose the motion. It ended up that I was conflicted and had to defer to a far mightier second man, Ron Shevlin.
Ron obviously was a stand-out star of the discussion in that not only did he win the debate with Michal Panowicz as his tag team partner, but he also got a lot of coverage of his rap:
Don't be a fool, Fintech don't rule. No doubt they're cool. But they're just a bank's tool.
Sam’s article in particular resonated as it focused upon Paul Revere’s Midnight Ride alerting the rebellious colonials to the fact that the Brits are Coming. Ron Shevlin likened this to Jamie Dimon’s comments that Fintech is Coming and we know how this ended – the Brits lost, as will Fintech in Ron’s view.
The real way to crack the onboarding and criminal activity is to create strong and secure digital identities. We are moving in that direction, but it’s a long slow process. For ages now, I’ve written about getting rid of passwords and improving authentication using mobile technologies:
In this world of choice that emerges from the integration of new technology models and old financial models, we see hybrid systems emerging that bring together the best-of-the-best. A great example was announced today, as Metro Bank and Zopa join forces. The deal allows deposits from Metro Bank retail customers to use P2P lending as an asset class for their deposits, with the expectation that this will provide higher returns on their savings. It’s an innovative deal in that P2P lending surely cannibalises that other asset class: credit. But it’s all about choice and if customers know that they can place money in Zopa, then why not allow them to do so through the intermediation of the bank to assure its viability?
This is where it gets interesting as I’ve seen innovative deals like this before. Fidor Bank (Germany) has been offering Smava’s P2P lending for some time through its operations whilst Caja Navarro (Spain), a non-profitable foundation, offered its own version of P2P some years ago. They called this Civic Banking and gave every customer the right to know the profit they made from each transaction and account. Through Civic Banking you could also invest in friends and family businesses and loan requests, with the bank ensuring the loan was repaid.
This is the point I am making when talking about aggregating the customer experience. If a customer has so much choice these days, do they really want to be opening accounts here there and everywhere with eToro, Circle, PayPal, Zopa, Friendsurance etc, or do they want to have an aggregator on top? I think the new emergent form of retail bank will be that aggregator. Like a Trip Advisor for travel, we will see front-end services that integrate many back end providers for finance. Some may say that this is just what the comparison websites do, but the comparison websites are not integrating and aggregating. They are just providing a rate choice and then you have to jump out to the provider’s own website to complete the transaction.
What I mean by the new component-based bank is that they will find the best providers of alternative finance and offer these services through their own portfolio of access. A one-time sign-on to get access to choice all in one window. That’s what Fidor are offering and, through the deal between Metro and Zopa, it’s another step in the right direction.
Meanwhile, a rock to throw.
I was pretty surprised to read these two headlines side-by-side the other day:
The reason I was surprised is that SMEs (Small to Medium Enterprises) are being commonly rejected for credit by banks, because they don’t meet their risk criteria. They are too small, too young, too untested, too unproven, too risky to lend to. So banks are recommending they go to Funding Circle and similar alternative finance houses. These alternative finance houses (AFH’s) opened a lifeline for businesses in the UK in the last year. For example, here’s Funding Circle’s homepage today:
And 13 months ago (yes, this was 20 April 2014):
Note the statistics: £225 million of lending enabled by Funding Circle a year ago climbing to £625 million today. A tripling in enabled funding in just over a year.
Meanwhile, the number of businesses borrowing through Funding Circle has almost doubled in that time, as has the awareness of this alternative financing marketplace. A lot of the funding of Lending Club comes from the UK Government, and it’s interesting to note that almost 98% of P2P Lending funds in the USA come from institutional investors.
So you have two key things happening here. First, the large banks are turning small businesses away to AFHs whilst de-risking their own portfolios by funding the AFHs. So the AFH becomes the risk manager.
That’s all well and good, but then take the other headline: SMEs stung by £425 million in hidden fees. This is where the Christensen disruptive innovation does start to hit as the AFH market looks like nothing today but, when I attended an Alternative Financing conference the other day, they didn’t call it alternative finance (which was a bit strange, as that was the name of the conference). They called it narrow banking. Narrow banking takes a part of the bank – a component – and squeezes that component to make it as efficient as can be for the process of its usage.
Here, in lending, it is a narrow bank focus on SME and consumer credit. A Funding Circle or Zopa squeeze the process of getting funds to those who need them to the max. And their customers love it. 77% of Funding Circle users say that after their first loan, they would return to Funding Circle first next time, rather than a bank.
So, on the one hand, banks are de-risking their credit portfolios by both funding narrow banks and encouraging their higher risk customers to use them. On the other, they are stinging their higher risk customers – small business customers – with higher hidden fees. And, on the third hand (yes, doing well here with my artificial limbs business), their customers now love their narrow bank and would not return to their old bank in the future.
That’s a broken model if you ask me. Broke for the bank that is, unless it really does not want any SME or consumer credit market operations in the future.
What banks should be doing is the Metro, Fidor and Caja Navarra approach of integrating the narrow bank offers into their customer aggregated experience. Instead, what RBS and Santander who partner with Funding Circle appear to be doing is saying that we would rather offload you to the narrow bank, than keep you with our bank.
That may be just my misperception, but it’s one that sits uncomfortably if true.
As the internet reinvents commerce on this planet, it’s interesting to see the two things that enter the innovation mix: simplicity combined with connectivity. When you think about the Uber, Airbnb, Facebook, Google, Amazon and more, you realise that they have all simplified some complex things from sharing to finding. Google’s home page has stayed pretty much the same since day one.
Clear, clean and simple, it’s a SEARCH engine. It helps you find stuff. It’s easy.
We think we’ve come a long way with technology, but we haven’t really. Sure we can now ping a message between a router in Hong Kong and London at the rate of 0.239 seconds speed; we can wear a watch that not only tells the time but takes photos, keeps our diary and tells us to stand up every two hours; we can store 1,000s of photos and keep a lifetime of memories on a drive that costs less than $100; we can travel around the world and back as easily as our forefathers travelled the next nearest town; and so on. But it’s nothing yet.
This is a blog from the Hotwire PR website, written by Camilla Ives. It summarises my good friend John Chaplin's Payments Innovation Jury Report report well. The report has been produced annually for the past four years and John will be presenting this in person to the Financial Services Club in England (June) and Poland (July). In the meantime, here's the low down.
So yesterday, I identified the three biggest challenges to banking today based upon a major dialogue on social media with the Next Bank Facebook community. Those three barriers are regulations, legacy and culture.
The three barriers are intertwined in a vicious circle. Regulations stop banks from innovating; legacy systems stop banks from innovating; a risk averse culture stops banks from innovating. All three things work together to wrap the bank in ropes of stagnation. Management are unwilling to change systems because it is too risky. Management are unwilling to place systems in the cloud because it is too risky. Management are so focused upon regulation, that innovation takes a back seat.
That’s one view of the world. The other view is that these are intertwined reasons for doing nothing.
So Apple Pay finally launched in the USA on October 20 and there’s been mixed reviews. Some people couldn’t make payments, whilst some found they were double-charged. However, these are just teething issues and the overwhelming reports are positive. Even former Apple CEO and Financial Services Club keynote speaker John Sculley:
I often talk about how our work-life balance has disappeared and that we now have just a tech-life balance. Social and professional have merged. What was personal is now shared, and things that would usually be private are now public.
This is clear from the way we seamlessly move between our social and professional lives electronically. One minute we’re posting work news on twitter, then next a shared joke. One moment we’re updating our facebook friends with our latest experiences and our linkedin colleagues with a more formal view. Before going to bed, we probably check our emails for work news and social media for friend’s news before we go to sleep and do the same in the morning.
24 by 7 we are morphing between work media and friends’ media and, as a result, banks and other corporations are starting to invest big time in being relevant in our social spaces.
In Boston I was honoured to be invited to deliver the keynote to my law firm sponsors, Goodwin Procter, at their third annual banking symposium. The audience comprised mainly community banks from the North East of the USA, and the discussions comprised panels debating the key issues we all deal with every day: regulation, innovation and demanding customers who needs are changing continually thanks to technology.
I’ve been talking about the hot new start-ups targeting the banking markets for a while. There are literally 1000’s of them – the Fintech Awards had over 750 firms to review this year alone – and sifting the wheat from the chaff is hard. There are a few standouts however, and these are the ones I talk about in my presentations.
They generally fall into three categories: wrappers, replacers and reformers.
Everyone’s getting excited about wearable banking. I’m often asked about it, and also see many examples appearing around such themes.
The first was Banco Sabadell offering a Google Glass banking app a year ago. In response, one of Sabadell’s Spanish bank competitors, Caixa, has gone a step further and launched both Glass and Watch apps . In fact CaixaBank went a step further and launched a FinApps Party, a competition to find the best wearable apps in the world. This year Garcon! won, a wearable app allowing streamlined checkout, multi-factor authentication, tagging, transaction history and purchase voiding.
Someone was attacking the premise of digital bank change the other day, by claiming it only refers to consumer banking. Nothing is changing in corporate or investment banking, they claimed.
All areas of financial processes, products and services are being attacked by some new start-up company somewhere. I realise this every day when I see so many bright young things creating a new model using direct connectivity over the net, and thus displacing the trusted intermediaries through technology.
Disintermediation is finally happening; it’s only taken twenty years to get there.
Bank pricing is the most opaque part of the industry, and the part that irritates customers the most. Customers get charged high fees for unauthorised overdrafts as this funds free bank services for those who don’t go overdrawn. Banks focus upon packaged accounts and cross-sell because the core deposit account is their loss leader. It is this area of banking that should undergo the most fundamental change over the next years and it is already happening.
I noted the disconnect between the bank community and the technology community sometime ago in my Red Pill moment, and as the year passes it becomes more and more obvious to me that we are going through a sea change in finance.
Almost every day, I encounter a new start-up who wants to change some part of the banking system.
Almost every day, I see news of a successful new business model in P2P lending, crowdfunding, front-end aggregation, PFM, mobile payments and more.
Almost every day, someone tells me how bitcoin is going to destroy the old banking system by working its way around that system.
Then I go to my banking conferences, and the people in suits – 1,000’s of Mr. Smiths here, as someone tweeted at SIBOS this year – spend all of their time talking about technicalities.
We had a revival of the Innotribe from SIBOS on Monday, by gathering the great and the good to discuss cryptocurrencies at the Escalator, an incubator for new fintech start-ups in East London run by Barclays Bank (if you want a primer on this, see Learn Cryptography).
The session was led by Richard Brown, Executive Architect for Industry Innovation, Banking and Financial Markets, IBM UK. Richard has become a semi-authority on the area, educating banks worldwide on the meaning of the technology of bitcoin and the blockchain. His speech was certainly appreciated here.