If Italy’s Monte dei Paschi di Siena (pictured above), which has been operating without a break for over five centuries, represents the banking sector’s history, its future is more likely to resemble that of a 35-year old company: the one behind the iPhone, iPad and iTunes.
“The thing about Apple is that they cover all the bases – they are developers, deployers, distributors and drivers of consumer technology – just as most banks are for finance,” Chris Skinner, a well-known author and commentator on the financial services markets, says on a recent blog. “That is why banks need to model their future on Apple.”
Skinner’s premise, and the views of other scheduled speakers at Sibos, an annual industry gathering taking place in Toronto, Canada Sept. 19-23, underscores how technology — and tech companies — is radically impacting the future of banking and the future of money. Potential banking industry responses to these new challenges are being tested in an incubator operated by Innotribe, the innovation arm of SWIFT, as the financial sector attempts to come to grips with shifts that have ushered in more change in the time it has taken to build Apple than in all the preceding centuries combined.
“Banking was invented in the time of the Medicis and didn't change until 20 years ago, with the introduction of Internet banking,” says Antonio F. Benjamin, Citigroup’s global chief technology officer and managing director of global transaction services. Fast forward to 2011 and “everything has changed,” he says.
Margins from transactions are dropping, alternative digital currencies are increasingly traded alongside physical ones, the volume of payments and money transfers over mobile devices is skyrocketing, and a host of nontraditional competitors are stepping in to offer new ways of banking.
“There is a real crunch coming — we are talking a Borders-, Blockbusters-type scenario — because when you have a product that can be easily digitized you can not protect the distribution model from disruption,” says Brett King, author of Bank 2.0.
Welcome to the networked, social economy. To be successful in this new world, banks have to adapt and evolve or be disintermediated.
“When historians look back at the massive shift in banking and rapid decline in branch activity, the death of checks, plastic and cash – the inflection point will be the creation of the App Phone," King says in a recent blog post. “This is perhaps Steve Jobs’ greatest legacy for banking today. He has changed the way our customers behave, he’s changed the way we think and the way we demand service. Thanks to Steve Jobs’ vision — banking of the future will be about banking embedded in everyday life, a true utility, and no longer a place you go.”
In an interview with Informilo, King described the kind of services a bank of the future might offer. For example, a consumer wanting to buy a big-ticket item in an electronics store might use his mobile device to instantly check whether he can afford it and be offered financing – in real time – by his bank. (see image page 12).
“The third generation of banking is changing how the bank interacts with you,” says King. “It is about context and helping an individual manage his financial life.”
Another new area being eyed by the banks and SWIFT is the banking of data. “Banks of the future will not only protect our money, but also the personal data that help us make better choices and decisions in our lives,” says futurist Venessa Miemis. SWIFT is already exploring an expansion into data banking – helping to secure all types of digital exchanges. Such a move would allow banks to play a key role in securing and disseminating personal data, which is increasingly seen as a new asset class.(See story pages 2 and 3.)
As exciting as those possibilities sound, most banks today are not innovating fast enough — if at all. And other players are rapidly filling the void, leaving retail banks detached from consumers by a layer of technology. For example, the introduction and explosion of the iTunes store was significant for banking, because the “app” has disrupted the retail financial services distribution platform by changing ownership of the customer experience, says King. Today banks that want customers to have access to their banking through a mobile “app” no longer have direct access to customers. Customers download the “bank” from Apple, Google, or other app store providers ; banks need to meet the criteria of the Silicon Valley giants’ marketplaces before customers can access that functionality.
Then there are the telcos. Canadian carrier Rogers Telecom, which announced in September that it has applied for a banking license, is the latest mobile operator to muscle in on the mobile wallet and payment space. Others include Safaricom in Kenya, Orange in the UK, the ISIS consortium in the US and LG Telecom in South Korea.
Should banks be worried? “They should be terrified,” says King. Here’s why: combining a prepaid debit card with a prepaid mobile phone makes a lot of sense to customers. There is really no difference between making a telephone call, an ATM withdrawal or a debit card transaction at a merchant — they are all just transactions from a value store, says King.
In developed markets, King reckons such services will likely result in the loss of around 10% of the retail banking consumer market in the next five years. That is not all: aggressive moves by mobile operators mean that banks could also struggle to expand their businesses in the biggest growth markets, where mobile banking services for the unbanked are booming. (See story page 7).
There is another big, potential downside for banks: losing touch with their own clients. “The day-to-day retail front-end of banking becomes owned by telcos, App stores, social networks and marketing organizations,” says King. “The bank becomes the back-end manager of risk and the product manufacturer.”
In that scenario banks end up reaping the lowest margin of the entire value chain because their cost structures, organization charts and metrics are not adaptable enough to reposition themselves against these new behaviors and operating models, says King.
To avoid that future, banks need to start doing what Apple and Google do: leverage the rich information in the electronic trail clients leave behind – the so-called digital slipstream, says Dan Marovitz, a Deutsche Bank managing director (see story page 6). This is not about processing transactions in mobile wallets. It is about the information generated before, during and after the transaction and how a consumer's behavior can be influenced. Marovitz says he sees no reason why large banks can’t design services that would directly engage consumers and effectively leverage that data to offer new services.
Banks also need to keep a close watch on Facebook, not just because they might learn how to better use social networking to build communities and engage and serve customers but because Facebook is now a competitor of sorts.
Facebook threatens the control traditional institutional structures have had over currency and personal identity, says Miemis, who is spearheading a research project onthe future of Facebook, co-sponsored by SWIFT’s Innotribe. Indeed, there is speculation that Facebook credits could become a global virtual currency and there is even the possibility of Facebook becoming a bank. It is already acting as a data bank, playing a strong role in how we use identity on the Web and what information about ourselves and our social graph is shared every time we log in and interact.
To best compete with such non-traditional players banks need to transform from a hierarchical to a more collaborative culture and become more socially responsible. This will also enable them to attract the right kind of executives to lead in future, says Mark Dowds, an entrepreneur and transformational consultant to corporations.
University of San Diego professor Frank Partnoy,a recognized expert on modern finance, believes banks need to halve the number of branches and employees.Bank branches that remain need to be re-energized to be as cool and engaging as an Apple store, says Skinner.
Like iTunes, banks’ online, mobile Internet services have to be so easy and engaging to use that customers are more comfortable dealing with a bank through these services than with any other, even for complex requirements, says Skinner. Simple wins. If banks can’t get rid of complexity, others will. Shamir Karkal is the co-founder of U.S.-based BankSimple, a Web-based service with a user-friendly interface, designed from the start for mobile. BankSimple plans to give users a real-time snapshot of their financial health and offer services such as a way to calculate a "safe to spend" balance figure that automatically factors in expected monthly expenses. It will piggyback on partner banks’ infrastructure but will push its own brand to consumers. It has already garnered more than 50,000 subscribers.
If banks want to enhance their own brands they need to scale. And the best way to do that is to open up application programming interfaces (APIs). “Banks need to harness the power of the developers out there,” says Citicorp’s Benjamin. Payment upstarts like Square, created by Twitter co-founder Jack Dorsey, are already doing so, attracting thousands of developers.
New services should also embrace new ways of engaging clients. Banks need to do a better job of using social networks like Twitter to listen to and communicate with customers, says Howard Lindzon, co-founder and CEO of StockTwits, a social microblogging service which allows users to see which stocks are trending. Customers are interested in relationships, says Silicon Valley seer Doc Searls. He predicts “every company is going to have to get personal again.”
King sums it up this way: “The future of banking is about connections with your customers, engaging them when and where they need banking to solve a problem or provide a service.” Banks won’t be able to influence people with clever ad campaigns, better rates or talk of branch networks, he says. “The only differentiation will be how you anticipate their needs and service them in their day-to-day life, wherever they may be.” Banks would do well to heed that advice, if they hope to have anyway near the staying power of Monte dei Paschi di Siena.