Plato once offered an answer to what drives innovation: "Necessity, who is the mother of invention". This can't be more true today in the banking and financial services industry. So how have customer needs changed in the last few years, and what does it tell us about the future of money? I try to answer these question after listening and interacting with visionaries in the financial and start up worlds who were present at the top financial innovation event in the country: The Future of Money and Technology Summit.
Overall, I found myself immersed in a sea of positivism and excitement about the future of financial services. Yes, there was dose of realists at the conference, and to certain extend retrograde thinking. Mikki Langston, one of the attendees at the conference, summarized the vibe in the crowd in her tweet: "There are 2 groups present: those who want to expand their financial empire, and those who want to change finance completely." Yet overall, you could feel the almost unanimous agreement that the future of money is bright and innovative for banking, payments, transactions and money management. Here is what the future holds:
It Will Be Very, Very Different
The last 3 years have provided the perfect opportunity for start ups and big banks alike to innovate. In an environment of credit crisis and financial instability, banks are trying to figure out how to make up for loss of revenue, while start ups are finding endless opportunities to fill the big disillusionment hole left by the traditional financial institutions. “What it means to be a bank is up in the air,” said Schwark Satyavolu of BillShrink. “There’s an opportunity to fill huge gaps in what has been a static industry for hundreds of years.”
Customer needs have changed significantly. After the credit crisis we suffered through, trust in the financial system is at an all time low, making people more aware of their money. Now more than ever, consumers want to know 3 things:
1. Where their money is: obviously trust in the institution matters, but also how the money is being used (invested) also matters more than ever. Is my bank using my money to indirectly finance industries that I am morally opposed to? is my bank investing in esoteric mortgage-backed securities? How can I influence how my money is used? As Don Shaffer from RSF Bank put it: "Consumers have no control of what their money funds at big national banks."
2. What my return is: whether my return is measured as an interest rate, a social impact, or as services and features, more people are now aware of how hard their money is (or should) be working. Why should I take a measly 0.05% on my checking account? when the bank is turning it around and lending it to people at 5%, 10% and even 20% (as in credit cards)?
3. What my fees are: free checking and high-yield accounts are now a thing of the past. Banks are trying to figure out how to make money, and consumers are painfullyaware of this situation as they experience increases in credit card rates, account fees, and other ways banks are lining up to collect more dough.
"It's expensive to be poor with the disappearance of free accounts and other services at your bank." said Ryan Gilbert from BillFloat. Some consumers are finding out the hard way, realizing they are better off moving their banking to other cheaper online options such as SmartyPig.com, or local banks and credit unions. At Lending Club, we have also experienced an influx of funds from investors who prefer to move their "idle money" into investments in consumer credit (personal loans) and obtain a higher, steady return instead.
Other consumer trends that will impact how we bank? Definitely! Everyone seemed to agree that in an age of hyper connectivity, social networking, and real time lifestyles, banking and financial services are changing for the better, and it will be very, very different in the future. It already has evolved significantly, if you count how mobile, online banking, and the evolution of personal finance management, credit score management (i.e. CreditKarma.com) and investing tools. Al these innovations have changed the way we manage and invest our money.
So one thing is for sure: change is happening in the banking industry, and there is no turning back.
Money Will Be Mobile, Virtual
Paul Blythe of Microplace jokingly said "Who uses cash? Primarily, criminals!". The same way we have seen a move from cash to credit, debit and gift cards, we will see an even more rapid adoption of "mobile money". Take the example of gift cards becoming obsolete: according to PlasticJungle's Bruce Bower , "most people are motivated to redeem cards within a week, but remaining balances are often forgotten. Mobile will increase redemption".
In this next year, we should also start seeing more trials of technology that allows account holders to "swipe" their mobile phones at points-of-sale. Bank of America seems to want to jump in on the technology first with this interesting mobile payment technology test.
Digital money will be even more pervasive in the global economy, as citizens of third world countries are starting to adopt mobile as the de facto standard of carrying and transacting money. This is a tangible and real way the unbanked and underbanked are gaining access to financial services: with a phone. Carol Realini of Obopay cited the example of Kenya as the world's most developed mobile payment market, where mobile payments equal 20% of all commerce, at a whopping $33 average transaction.
Personally, I certainly hope mobile becomes a more prevalent form of payment, perhaps kill the debit card altogether in the distant future. One thing did seem funny to me: I still had to use cash to pay for lunch and later get a drink at the cocktail reception after the event. Ironic, isn't it?
Projects and Financial Products Will Be Crowdfunded
Long are the days when people had to knock on doors or send mail to get a project funded. Collecting money, be it for a non-for-profit organization, starting a business, or other more selfish endeavors, has seen a dramatic change in the last three years with the help of social networking, online based microfinance, crowdfunding, and peer lending. Even venture capital is currently being raised online. Lending Club was mentioned in several panels as an example of a new kind of trust building financial institution that uses transparency and simplicity as core to its model. Try that at your favorite bank.
For example, to get a personal loan, consumers had only 2 options until recently: knock at their bank's door, or ask friends and family. Now, companies like Lending Club have made a financial product such as a personal loan available at lower rates by allowing other individuals to fund those loans. In the UK, this concept has had so much success with Zopa pioneering the space, followed by a handful of other companies (ratesetter.com, yes-secure.com, quackle.com) that the media hails it a true challenge to tight-fisted banks.
Danae at IndieGoGo spoke about the establishment of online money-collection as the most efficient way to raise capital, while Jessica Jackley of ProFounder talked about how entrepreneurs will soon have more options to fund their businesses. AppBackr debuted their model to get mobile apps funded and distributed leveraging the VC funding wisdom of the crowd. Even the "future of angel investing is all in the cloud", said David Rose of New York Angels. Crowdfunding eliminates the middle man, creating efficiencies and benefiting both sides of the transaction. As crowdfunding models mature, we'll see more institutional money and even banks jumping in to invest some of the cash they have sitting around.
Financial Decisions Will Be Information Driven, Made with Social Input
Yes, I did say it during my panel: "The last taboo topic on Facebook is money. People still feel more comfortable sharing about their sex life than their checkbook on social media". It is true, how many of your friends have you shrugged your shoulders on thinking: "Did you really have to share that?, where is the dislike button?" But I bet you have never said: "Hmmm, let me help my friend X with her CD or financial question". This is not about to change, folks. Money is a difficult topic to discuss in public. You don't share your money decisions with your close friends over dinner, why would you go on Facebook to do so? However, social networking and social media serve as message augmentation and sharing of good news. Since many of the new financial products are smartly integrating social media as part of their communication strategies, they have the potential of faster adoption and "sharing" among friends, family and even strangers.
Another clear trend is aggregation and visualization of financial data: aggregate data from social networks and money transactions will play a central role in financial decision. This is already happening to certain extend in places like Mint.com, CreditSesame.com and ReadyForZero.com, where better data visualization of your money and credit situation helps consumers make smarter decisions. User Experience will become an integral part of managing one's finances, as real time engagement banking will be more expected by consumers. BankSimple, ING Direct and CBW Bank are examples of new financial organizations that get this concept better than the big banks.
Will we see Facebook become a bank? I don't think so, but social media will most definitely play an important role in the evolution of banking and financial services.
Back End Will Still Be Dominated by the Banks
Antonio Benjamin, Global CTO at Citi Group, painfully reminded the crowd during his conference closing remarks that most innovation in the last few years still depends of the core banking infrastructure. He instilled some hope when he stated that his "personal aspiration is for Citi to provide entrepreneurs access to the banking infrastructure, including global payment network". Still to be seen if a major bank would do something that bold. During a couple of sessions, people got really excited about progress made in the last year to make the banking infrastructure more open and distributed, but the fact of the matter is that regulation and central governance seems to impede significant progress in this area. It's still to be seen how much advancements in technologies will help the core banking infrastructure advance its centuries old core. Open source currency? distributed virtual economies? alternative payment systems? I'll give all that a big TBD.
What do you think the future holds for banking?
Drop us a comment below and tell us what you think: how will you see the banking and financial industry evolving? What features or products are you more willing to adopt? What emerging changes in consumer behavior or attitude will shape up how we use and manage our money?
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