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Betting the bank

The banking industry is fiercely conservative, and many bankers proudly claim they don’t even need to innovate. But they’re wrong. Here’s how banks will need to adapt and what it means for the rest of us.

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Illustration by Gary Venn

The banking industry is fiercely conservative, and many bankers proudly claim they don’t even need to innovate. But they're wrong. Generation C—online and in control—won't give them a choice. Here's how banks will need to adapt and what it means for the rest of us. By Simon Young and Jake Pearce

History shows that banks don’t innovate unless circumstances force them to. Yet that doesn’t reflect how innovation usually happens. Markets gently evolve, then jump.

Market evolution mirrors biological evolution. All those dinosaurs slowly evolved, then suddenly—jump—they were gone.

For dinosaurs, it was asteroids. For businesses, entire industries are often taken off guard by created needs. And banking is ripe for a meteor shower.

When times were tough in the 80s, you stopped your car loans and credit card, but nobody defaulted on their mortgages. The first thing people stop paying now is the mortgage, because they want to keep their lifestyle and the bank can go hang themselves

David Cunningham, general manager of marketing and products at Westpac in New Zealand, doesn’t believe there is such a thing as innovation in banking, and he probably speaks for much of the sector. “We all offer very much the same thing,” he says. “The best approach to innovation is to arrive best dressed and last—then you can get your offer better than the others.”

And why not? After all, there’s no perceived threat to banking, according to Huib van den Berg, former corporate relationship manager at Rabobank in the Netherlands. “Apart from shifts in technology, there aren’t really going to be any big challenges to banks,” he says. “We have the trust. I suppose the biggest threats could come from Google or Microsoft.”

But while the banking industry doesn’t see any asteroids in its future, we do. At best, it means significant change ahead for the banking industry. At worst, it could mean extinction.

We used scenario planning, a method of predicting the future when there are a lot of complex variables. It’s the same approach used by large multinationals. We also had some valuable help from knowledge hunters BridgeEllis and finance industry consultants the Santa Fe Group in the US to identify key trends in banking.

Trust

We trust banks less than we used to. The Edelman Trust Barometer shows trust in banks worldwide reduced from 56 percent in 2008 to 45 percent in 2009. This is part of a larger trend away from trust in institutions, from government to religious organisations to corporations (see ‘The conversation’, Idealog #22, page 58).

A Cisco Systems survey in November 2008 reported that consumers don’t automatically trust a bank more than a non-bank to handle their money. Evidence, perhaps, that the unassailable advantage banks usually claim over their competitors—their trusted position—may be slipping away.

This loss of trust is not just making banks feel bad. It’s hitting their bottom line. Banks’ share of the payments business is declining three to five percent a year, according to Jim Greene, vice-president of Cisco’s global financial services practice. That’s a cause for concern when payments are 40 to 60 percent of your revenue.

Barry Clark from The Future Foundation in the UK has a different take on trust. People will say they don’t trust banks, he says, but they aren’t taking money out of banks either. “It makes you wonder how important trust is,” he says.

Clark theorises that trust is not a precondition of the purchase decision. “Banks may not be trustworthy but they’re capable,” says Clark. “A ruthless bank may actually be good for you.” Government guarantees certainly help too.

While trust in banks worldwide is down, it’s only down two percent in India and has actually risen in Brazil and China compared to 2008 figures. Perhaps banks, like newspapers, will experience a renaissance in the emerging economies.

Another fascinating result from the Edelman barometer: the most trusted sector worldwide is technology. More on this soon.

Loyalty

Kiwis didn’t always want to own their own homes. Not until the Great Depression, when it was seen as a crucial survival factor. For the children of the 1930s, owning a home became a must.

What about this recession? Will it change the way Generation C reacts?

“When times were tough in the 80s, the first thing that stopped were your car loans and credit card, but nobody defaulted on their mortgages,” says Ben Milsom, a co-founder of peer-to-peer lending service Nexx. “The first thing people stop paying now is the mortgage, because they want to keep their lifestyle and the bank can go hang themselves.”

When times were tough in the 80s, you stopped your car loans and credit card, but nobody defaulted on their mortgages. The first thing people stop paying now is the mortgage, because they want to keep their lifestyle and the bank can go hang themselves

It’s also a reflection of the way people feel treated by banks, says Milsom. Consumers haven’t been given much loyalty, so they don’t offer any in return.

Generation C also has easier and faster access to shop around for traditional banking products, using news sites like Interest.co.nz or automated services like Fundit.co.nz.

Mobile

It’s obvious the internet and mobile communications are affecting banking. But how exactly?

In Kenya, only ten percent of the population has a bank account, but nearly everyone has a mobile phone. Vodafone teamed up with local telco Safaricom to provide M-Pesa, where people trade with cellphone credit instead of cash.

The same thing is happening throughout the developing world, and even in more developed countries like South Africa and Canada. Zoompass, a joint effort between Canada’s mobile providers, provides bank-free money exchange.

In the US and the UK, banks are getting on board the mobile revolution, too. US customers can now interact with seven of the top ten banks on their mobile.

So banks, true to form, are innovating only in reaction to technological changes. And the race is on to provide the best mobile banking experience.

Mobile banking could go one of four ways:

  1. Banks could buy mobile phone companies. Possible, depending on market capitalisation, but unlikely because banks don’t usually want to own non-banks.
  2. Banks could withdraw from mobile phone services. Unlikely, considering the loss of revenue.
  3. Mobile phone companies could buy banks. Possible, depending on market capitalisation.
  4. Or banks could enter into formal joint ventures with mobile service providers. This is highly likely.

Some mergers and joint ventures will be disasters; others will succeed. The continuing tension, however, will be ownership of the customer—something experienced by every manufacturer who sells at retail, every credit card that offers bank-branded cards, and every content producer who depends on a media channel. Who will own the relationship? Mobile operators or banks?

Personalisation

Gen C isn’t just used to mobile, they’re also used to personalisation—and that matters a lot, says Shelby Hutcherson, vice-president of the innovative solutions group at Synovus. For Gen C, privacy is irrelevant.

Right now, banks are either mass products (the retail bank brands we all know) or private banks (such as Lloyds or Coutts—highly personalised products). We foresee the rise of mass customised banks, where technology will play the role of a personal banker for a few high-value customers.

So far, it’s all good news for banks. They already have the infrastructure, they arguably have the trust, and the technology is available to them. Where are the asteroids?

Peer-to-peer

The fastest-growing banks in the US are peer-to-peer (P2P) banks—brands like prosper.com that enable people to lend each other money online. P2P banking has $740 million available in funds and has so far made 27.4 million loans.

Nexx’s Milsom says banks don’t see them as a threat. “They don’t want to get involved with the end of the market we’re chasing. They want to fund mortgages,” he says. “P2P doesn’t work all that well for that, because the money gets tied up for so long and [it’s] such a large amount of money.”

P2P differs to traditional banking, says Milsom. “We still care about credit scores and serviceability of the loan, but we also care about what you use the money for, what kind of person you might be and what your history is ... the stuff that otherwise wouldn’t be acknowledged.”

P2P is going to be big. Verisign’s mobile banking product manager, Amit Bhojwani, says even mainstream players like Western Union are working with the company to facilitate P2P payment via mobile to South America. “Peer-to-peer is the fastest-growing banking sector in the US.”

Now we start to get into asteroid territory.

Only a minority of banks are actively pursuing innovation, yet their greatest competition may come from obscure quarters—industries that don’t even look like banking. In fact, not even industries. Just people.

Globalisation

Globalisation has touched almost every industry but banking. Despite most New Zealand banks being Australian-owned, their branding and operations are still resolutely local.

MasterCard and Visa, however, compete as global brands.

P2P differs to traditional banking. We still care about credit scores and serviceability, but we also care about what you use the money for, what kind of person you might be, what your history is

And on a micro-scale, mortgage brokers are becoming the trusted brand, perceived as independent and closer to the consumer than the bank brands.

Could a reversal be in the wings? Where mortgage brokers—and online services like Fundit.co.nz—are the brand that ‘owns’ the customer relationships, and the banks themselves are just commodities?

The asteroid

Alone, none of these factors is a bank-killer. But collectively, it’s a different story.

Generation C trusts non-banks just as much, or even more, than banks. In a recession, Gen C is more prone to shop around, and they have the technology to do so. They also welcome more personalised relationships. Non-banking organisations such as mortgage brokers, retailers and mobile networks are moving into the lending and money-management business. In fact, mobile phones are becoming the default place to manage your money. And globalisation sees pressure for global financial deregulation.

Together, these factors mean a radical jump, an asteroid, an extinction-level event for banks as we know them.

Imagine this. Bill and Sue are having a baby! He’s a Kiwi, but they live in the UK.

With a baby on the way, it’s time to buy a house. Instead of approaching a bank (how archaic) or even a mortgage broker, they specify their needs on a reverse auction website. The banks—and other wealthy individuals—then bid for Bill and Sue’s business.

Of course Bill’s parents will want to meet the new arrival, so it’s lucky Bill still has a bank account back in New Zealand. Kind of. In fact, it’s the same account he uses in the UK, through a bank partnership between ANZ and NatWest.

But he doesn’t consider it either ANZ or NatWest, he thinks of it as Vodafone—after all, he accesses his banking through his Vodafone mobile.

As new parents, Bill and Sue wonder how the next generation will manage their money. After all, so much has changed in a few short years.

Generation C trusts non-banks just as much as banks. In a recession, they’re more prone to shop around and they have the technology to do so. They also welcome more personalised relationships

Far-fetched? Bear in mind that the music and news industries considered the internet an amusing aside for several years before being torn limb from limb by their own lack of proactivity. Banks, too, don’t see that their race is not against other banks, or even other ways of doing banking, but against the very customers they want the most: Generation C.

Banks and Gen C have something in common—the desire to control their destiny. In a battle between the two, our money’s on Gen C.

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