The following is a guest post written in collaboration with Brett King, author of the Bestselling book Bank 2.0 and strategic advisor to the global financial services sector. He publishes regularly in his role as industry advisor at The Banker, Huffington Post, Internet Evolution, FinExtra and his own personal blog Banking4Tomorrow.com.
It is a common theme that some banks may have gotten too big to fail. But have banks also gotten too big to… innovate? In the last few years, banks seem to have lost their innovative edge, coinciding with one of the worst financial crisis our country (and the world) has ever experienced and leaving customers looking around for solutions that banks don’t have. Where has innovation in the banking industry historically come from? And why is it not happening now?
History of Banking: The First Innovations
The very first innovation in the banking industry occurred in the third century when merchants issued the first checks. In Persia, the Sassanid Empire issued letters of credit known as Chak or چک. This is where we get the name of the 'cheque' or check. Merchants became the first bankers and this early version of banking was done within an empire or country.
Between 1,100 and 1,300 AD, more official banks were established, opening “branches” in remote, foreign locations to support international trade. In 1,327, the city of Avignon, France, had 43 branches of Italian banking houses alone to support the active commerce between these two countries.
International trade and commerce drove the development of an international banking network, which later growth was driven by local economies and industries: oil, iron, diamonds, automobiles, travel and more recently computers and technology.
No wonder, banking is perceived as a very traditional business… it has been around forever!
The Evolution of Banking: Recent Innovations
Aside from its expansion and growth internationally, and its subsequent penetration into consumer and retail banking, what real innovation has the banking industry brought to light? It seems like the core of banking has remained the same throughout the ages.
Most recently, the banking industry has come under fire for applying its “innovating brainpower” in the wrong places: creating esoteric investment vehicles and extending credit “creatively” in ways that proved to be too risky.
Paul Volker, former Federal Reserve chairman, once said that the ATM was the last real innovation in banking. He went on to say “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence.”
But is banking really still in its ancient days? Obviously not. We have seen bankers incorporate new technology to enhance their reach, customer satisfaction and overall access to their services.
In the 90s, the Internet and Internet Banking significantly changed the way we interact with and think about banking. It gave consumers choice and control – choice to bank when and where they wanted. Instead of being locked into going to a physical branch between certain hours of the day.
It also made comparing financial products side-by-side a lot easier, giving customers more options, and making it easier to switch from a bank to another. Even though switching your bank was still a time consuming task, at least you had all the information to make more informed decisions.
Credit cards and later debit cards became a standard feature of the core banking products. Now your cash was readily available electronically, without the need to use bills and coins.
More recently, social media increased access to and transparency of banks. We now have direct feedback channels to some banks (beyond the regular branch or phone based customer service). Some banks have taken advantage of this new channel to listen to real-time feedback and identify opportunities to service their clients better. Bank of America, USAA and Citi are leading the way in incorporating social media into their customer service platforms. What’s it it for them? Well, we now know, real time, when a bank sucks and hides behind outdated processes or expensive fee structures. We also get to see how they interact and treat their customers. The power has shifted from the few big centralized institutions to the crowd.
When mobile came along – our expectations of banking also changed. Now we expect banks to deliver while we're on the move. And not just an account balance – we want increasingly complex interactions: text my bank to complete a transaction, take a picture of a check and deposit it, transfer securely between accounts, and why not, just wave my phone and pay at the supermarket.
On top of the hyper-connected mobile world we now live in, geolocation services are expanding our reality beyond what we see, smell and touch. Mobile is not just another medium for content delivery, but full interactivity has brought new features that are changing the way we relate the world and others around us. At the moment, American Express seems to be the only major financial institution embracing geolocation by partnering with FourSquare to bring exclusive offers to their card holders.
The next stage is clearly mobile payments. When you can make a mobile payment from your phone – what happens to checks, to cash? How quickly will they disappear? Or will they ever disappear? We seem to be adding more and more features, without evolving the core banking system.
The New Era in Bank Innovation: Disruption
The nature of large banks is that they take a long time to change. They seem to think that customers will put up with slow innovation because, until now, we have had only a few choices… If they think customers will put up with the lack of innovation, they will be in for a rude awakening.
The largest institution in Kenya is a telecommunications company, Safaricom, who launched the M-PESA payments system in 2006. Just 5 years old, M-PESA has 12.5 million customers, compared with the 3.5 million banked customers there today. A telecommunications company figured out a way to reach the majority of the population that, until then, remained unbanked or underbanked.
PayPal was born out of a need for online payments, where the banks and card issuers were simply too slow to respond to changing customer behaviors and needs, and insisted in keeping their banks payment systems siloed.
The best deals for loans are now available through direct lending models (a.k.a. peer lending) like Lending Club in the US or Zopa in the UK. Since launching in 2007, Lending Club has issued over $235 millions in loans, while those investing in the loans consistently receiving over 9.5% average net annualized return. Zopa has a non-performing loans ratio of 0.75%, much better than the best banks in the UK.
Customers now have access to better tools to manage and budget their money. While the banks have focused on moving --and making it easier for people to spend-- money, personal finance management tools like mint.com have become popular among a financially savvier generation that does not see the bank as a trusted source of information to make the best money decisions.
A new generation of credit tracking tools, such as CreditKarma, Credit Sesame and ReadyForZero, allow consumers to manage their credit score profile and find better alternatives for financial products: mortgages, credit cards, personal loans, and more.
The way we are interacting is rapidly changing too – it is no longer enough for a bank to claim process, policy, regulation or other excuses for why they can't get something done. BankSimple, Square, SmartyPig and others are showing us how banking should work today: how we save, how we pay, how we manage our money.
What the Future Holds
The gap between the customer, their behavior and the way banks are acting is rapidly growing. Consumers are not looking at Wall Street and other financial centers to solve their problems and address their needs. Customers have greater expectations today. Expectations that aren't being met by banks, but ARE being met by innovative companies who are closing the gap between the customer and their financial lives.
Could a new major disruption to currency and payments be around the corner? Could FB Credits be the next global currency, powered by 700 million globally connected customers? Can a technology startup shake up the very core of the banking system? Perhaps Silicon Valley and other centers of innovation will slowly take over Wall Street and change the landscape as we know it.
So if you're a bank today…ask yourself. Do you want to be left simple as the wires at the back-end of the transaction, a product manufacturer, while innovators steal customers, deposits, margin and market share?
Is it too late for the banks already? Hundreds of financial services related start ups have taken the banking industry by the storm. To name a few: Mint, Obopay, Facebook, Foursquare, BillFloat, Lending Club, Square, BankSimple, CreditKarma, SmartyPig, PerkStreet, SecondMarket, Dwolla, Fee Fighters, Kiva, Kickstarter, Paypal, BillShrink, InDinero, Bundle, Outright, CreditSesame, ReadyForZero, Betterment, Zecco, PageOnce, Swipely, Blippy, Expensify, wePay, everFi, KAshoo, Kasasa, Wealthfront, MoneyAisle, Covestor, eRollover, DailyWorth, PlasticJungle, Bling Nation, Payoff, e*Trade, Tradeking, PayNearMe, Zopa, SmartHippo, LinkedFA, ChargeSmart, myTafi, DebtGoal, IndieGoGo, GrowVC, Profounder, eToro, bill.com, eWise, Fiserv, kiboo, outright, miicard, Striata, GoalMine, Yodlee, SecureKey, Cash Edge, Cardlytics, Clairmail, Oweing, Plastyc, iPay, mFoundry, StockTwits, Strands, Boku, Geezeo...
Seriously, that was *just* to name a few.
This new wave of financial service innovators are pushing the limits, incorporating cutting edge technology, social media and -- believe it or not -- genuine customer service. This new group of financial players is stealing the traditional banking customer and giving banks a run for their money.
What does the future hold for the banking industry? Do you think banks will continue to serve as the core of our financial networks, with new more agile services sprawling around it? Will technology companies be able to penetrate, evolve and simplify the banking system? Or will banks bite back and take the stage away from them?
What do you see in the future for banking industry?
Share your thoughts in the comments or join a live discussion at SXSW Interactive on Saturday March 12.