Warning to banking’s technology laggards: innovate or die
Illustration: Michael Kirkham
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Warning to banking’s technology laggards: innovate or die

January 2013
Bank customer behavior is changing – fast. It’s time to get on board or out of the way, warns Movenbank CEO Brett King.

Alongside the cracks in the facade of what was once a secure banking system, the retail banking space has also faced an entirely different challenge: a threat to the very role of banking itself. In an age where I use my mobile phone and the Internet more than I watch TV, and where bookstores, video rental stores and other mainstays of physical retail commerce are morphing into digital forms, banks are looking increasingly out of touch.

The problem is one of relevance. Mobile devices and the Internet are causing a massive shift in bank practices, distribution models and competitive landscapes. Banking is no longer defined by a physical distribution network or physical artifacts; it is no longer somewhere you go but something you do.

“The banking customer will interact with a bank 500 times a year – but speak to someone fewer than five.”

We’re seeing a sea change in bank customer behavior, with technology at its center: behavior that will change typical interactions and channel preferences of the day-to-day banking relationship; behavior that will render irrelevant many of the processes, contracts, business rules, metrics and systems of current retail banks; behavior that will redefine what it means to be a bank.

By 2016, the average retail banking customer will interact with a bank 500 times a year via mobile, tablet, web and ATM, but might actually speak to someone from the bank fewer than five times in that entire year and visit a branch maybe twice. This trend is already creating a significant behavioral gap between the consumer and the institution, one that is being filled rapidly by better-positioned, non-bank competitors like PayPal, Square, Apple, Starbucks, and P2P lenders.

Be assured that this is disruptive and controversial. What we used to regard as banking is about to receive not just a makeover but a complete reboot.
Four-stage revolution

There are four key phases to this upheaval in customer behavior. The first occurred with the arrival of the Internet, and has been amplified by social media. The web changed forever the way customers accessed their bank and their money, and this gave them control and choice.

The second phase is occurring right now: the emergence of smartphones and tablets is a driver for portable or mobile banking. The third phase is the game changer — the loss of physicality and the move to mobile payments on a broad scale. NFC-based mobile wallets and stored-value card micropayments are already here, but more is to come. This third phase also involves the convergence of people’s mobile phone with their credit/debit card. When these changes occur, the public’s need for cash will reduce rapidly, and the disruption will be far-reaching. So as soon as phase three hits, the battle for the basic bank account will be on — and it’s likely to result in the mobile phone becoming the day-to-day bank account.

Think of it this way: what’s the difference between a prepaid balance on a city transportation pass — such as the Oyster card [London], Octopus card [Hong Kong] or MetroCard [New York] — and a deposit in a checking account/savings account? How would we explain the difference in the deposit-taking mechanisms of a basic bank account, a prepaid debit card and a prepaid telephone contract? And what if all prepaid accounts allowed people to pay at a point of sale using an NFC-enabled phone?

The fourth phase will be the unhinging of the basic bank account from the bank. This will occur gradually over the next decade, and banking will never be the same 
again because it will be everywhere, and anyone will be able to provide its basic services.

The ability to store a balance or take deposits is no longer the sole domain of “banks” that have a full-blown banking license. As value stores begin to abound and the mobile wallet gets hooked into everything from the iTunes store to Facebook credits, loyalty cards, transport systems, and beyond, the basic bank account will become the ultimate commodity. When banks lose this day-to-day account to the mobile phone or commodity value stores, they will just be left with specialist banking products, investment management and the movement of funds.
Matching the pace

In the near future, it is likely that retail banks will be predominantly IT or technology companies, with banking being simply the utility provided by them. As customers move their day-to-day relationship to a mobile wallet, hinged to a bunch of value stores that give them the functionality of a basic bank account, the banking sector will lose a vital platform for relationship development.

And if it takes just months for new emergent technologies to insert themselves into the mainstream and change behavior, and a bank has a 12–24 month development and deployment cycle (typical of most banks’ IT departments), then it’ll be at least three to four years behind if it waits to see someone else’s ROI demonstrated before it commits. That’s more than enough time for an agile intermediary and third party to take a big chunk of its customers, for revenue to disappear, or for the remaining margin to be hammered into non-existence.

In the end, many banks that were household names during the 20th century will cease to exist as they are displaced or consolidated. There’s not even a choice of when banks invest any more — if they’re not already heavily investing in all of these technologies, they are well behind the behavior and expectation curve, and will be disrupted.

Brett King’s book, Bank 3.0, is out now.
First published January 2013
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