Brett King

Archive for October, 2010|Monthly archive page

The Rapid deconstruction of the retail banking sector

In Customer Experience, Retail Banking, Strategy on October 27, 2010 at 06:23

The concept that banking is necessary, but banks are not has often been debated. The question of whether technology advances and new business model results in disintermediation is often dismissed as hype. While the Internet is undoubtedly the most significant technological advanced of the modern age, most retail bankers would argue that this only produced an incremental change in banking with yet another channel to access the existing bank infrastructure. However, that’s only partially accurate as an assessment.

If you look at the broader world, there are actually tons of new businesses eating away at the retail banking client experience:

Independent Financial Advisors
While banks proclaim platform, global experience, asset management capability, etc the fact is that the advisory space is not owned solely by banks. In fact, if you really want a dedicated Relationship Manager who is going to not just sell you a product you really only have two choices – IFA or Private Bank. The mass affluent HNWI space just doesn’t deliver…

Contactless Mass Transit Payments
Octopus in Hong Kong, Oyster in the United Kingdom, EZLink in Singapore and other such stored value smart cards are actually debit cards. Octopus has a limited banking license in Hong Kong for the purpose of deposit-taking, but let’s not kid about here – all of these are acting like banks, but aren’t banks. As banks we can justify the fact that these are minimal impact and argue that ultimately the payments come from the banks to “recharge” these cards, but the fact is we’re not in the mix.

Mobile Payments
In some ways the big hit of SIBOS this year has been mobile payments arriving on the scene. The only problem with this is that M-PESA launched in Kenya in 2006 and now ‘owns’ between 5-10% of Kenya’s GDP, GCASH launched in Philippines in October 2004 and now has 28,000 outlets supporting their services across the country. There are other examples too – Nokia is set to dominate the mobile payments space in India as they turn their stores into cash-in/cash-out points across the sub-continent. Where are the banks? Some banks are now offering withdrawal through ATM networks for mobile cash users, but the fact is banks are still arguing about interoperability, platform, security and alliances to be productive – so again banks are missing out.

Peer-to-Peer lending
Zopa now represents close to 1.5% of the UK lending market with monthly lending of GBP 10-15m. With a reported NPL of 0.7% they are also the industry leader in the UK for credit management. Bankers would find this counterintuitive – how can a non-bank have a better performing loan book than a bank? The answer is better value to the consumer, and social lending as the foundation. Prosper, Lending Club and others are also taking their fair share of the lending markets in places like the US. Average loan sizes for Lending Club and Zopa are not microfinance size either, being around US$2-3k. This is direct competition for the retail banking sector.

Peer-to-Peer and alternative Payments networks
PayPal is clearly the leader in online payments today, and while PayPal utilizes existing card networks and payments infrastructure, the fact is that in the area of capturing transactional revenue and in respect to ownership of consumer mindshare, PayPal reigns supreme. On eBay, for example, between 50-75% of payments are processed via PayPal. Banks like HSBC are proud of the fact that they process much of the back-end payments for PayPal – but surely being in the front-end is the sweet spot here.

Merchant onboarding
Square, from Jack Dorsey (Twitter founder), has recently gone live. All you need is an existing bank account and an Android or iPhone and you can start accepting credit card payments. Currently Square is deployed in the USA where there are more than 20 million small business owners who don’t have a merchant account with a bank. The merchant on-boarding process is just too complex for most businesses, and Square recognized that. What would you rather do? Download an App and sign up for Square, or negotiate the 150 pages of different legal contracts and forms from your bank to set up a merchant account? Banks don’t offer value here – in fact, the opposite.

Disintermediation abounds and is speeding up

This morning at SIBOS we just heard Karen Fawcett of Standard Chartered proclaim

“Transaction banking is now front and centre. Flow businesses that we support are the lifeblood of commerce.”

The problem is this view of the world. Bankers are simply used to owning the pipes, the network, the wires and perceiving that their exclusivity on ‘banking’, their ‘lock on customers’ comes from having a banking license. Clearly, however, disintermediation of the retail front-end of banks is rife. Banks are becoming wholesalers, networks and product manufacturers, but clearly with the lack of innovative capability, the rapidly growing gap between customer behavior and retail banks as poor service companies, the question of whether we need banks has been answered…

We don’t need retail banks – we do need the back-end networks that process payments, we need organizations that are prepared to take on the risk of lending (social lending is unlikely to scale up to mortgage level), and we need mechanisms that give us access to trading systems and markets. But retail banks, their physical distribution real-estate, their products and services are fast becoming redundant. Sure, it will take a couple of decades, but in many ways it’s already too late.

The ‘things’ that were uniquely “banking” 20 years ago, today have all been replicated by a transport department, an internet start-up, a social network and a telecommunications company. Banking at the front-end is no longer unique, it’s a commodity. When such interactions become commoditized, then the concept banks leverage of paying for the privilege of banking make them easy targets for disintermediation.


SIBOS – Confusion reigns…

In Customer Experience, Strategy on October 26, 2010 at 06:47

If I was to identify one dominant response from bankers at SIBOS this week it is confusion. Not confusion over the event, where to find sessions, or what they are doing here, but confusion over where the banking sector goes next.

The fact is, after time immemorial where banking has essentially remained the same, bankers are suddenly thrust into a world where trust in banks is questioned, where the value of the bank in the value-chain is questioned, where the way we (as bankers) interact with customers at large is rapidly changing (and therefore questioned), where regulators are facing innovation that is so rapid they don’t know where to start or what questions to ask, and where a plethora of new business models that look and smell a lot like banking, but aren’t are increasingly popping up – the big question is what is banking at the end of the day?

What banks aren’t

The concept that banks are a place to hold your money is difficult to reinforce when money is essentially digital. The concept that banks are physical locations where you go to bank, is difficult to align with behaviors where mobile and internet will dominate daily access to the bank brand. The concept that unbanked customers are out of reach of a bank because of lack of profitability, when M-PESA and others are showing you can do massive transaction volume – make us question our margins. The concept that banks are the sole purveyors of ‘trust’ in an environment where trust in banks is at a all time low and where social media can destroy your brand at warp-speed, is obviously a challenge. As digital begins to overshadow the physical elements and the traditional networks that have underpinned banking, where does banking fit in our daily lives?

This was really borne out when I chatted with a senior executive from Western Union after my session at Innotribe today. He asked me what I thought Western Union’s business would become and how to bridge the challenge of mobile payments. I commented it would make sense for Western Union to act as locations for converting cash to digital/mobile credit and visa versa. His comment:

“Yes, well that will work for a while…”

But what about regulators, AML and compliance requirements, payments networks, and other constants that provide the backbone to the banking sector today – surely these can’t be easily circumvented? Maybe those aren’t constants any longer. Maybe they are legacy issues.

The key emerging at SIBOS this year is really how do we restore trust and stay relevant given what banking will become?

I think therefore, I innovate

This is the intellectual adjustment that bankers are going through at SIBOS this week. There is the grudging acceptance that the bank industry is NOT going to return to normal. There is a “new normal” that is being thrust upon bankers, and this is confusing. Why? Because it is untested territory, there is no defined path that is clear in respect to how we move forward as an industry, but one thing is for sure… it’s going to be very different from where we are today.

At the moment we’ve got lots of bankers who are running around talking about clouds and crowds(ourcing), social media, mobile payments, trust, leadership, Apps, APIs, innovation and so forth, and an equally overshadowing plethora of vendors and solutions providers pitching their wares as the magic piece of the puzzle. But there’s no straight answer – we know where we have to get to, but not how to get there.

Where do we start?

Leading banks out of this confusion will not be easy. The problem really is that while many bankers now get the big shift, there are an equal number of proponents of the risk adverse strategy who say we should wait and see what happens before trying to move the big ship.

This is the big challenge. As an industry we are simply not used to the scale of disruption, changes and challenges to our conceptual models of banking and payments that we see today. This scale of disruption means that, in fact, there is not a clear dominant solution emerging, there are tens, hundreds, perhaps more. In this environment what is the best course of action? When we have less and less time to adapt, how do we enact the sort of structural, strategic and financial changes that are required to re-mobilize (excuse the pun).

It has to start with a desire to change, to adapt. That’s the toughest part for many of the SIBOS attendees this year. It is perhaps the first time that intellectually as a group we are seeing the sector understand that it is our instincts that we have to change.

Change, disruption, the importance of engaging the customer and redesigning banking in that spirit, along with an ongoing culture of experimentation and innovation are the only certainties that are emerging. This is not how you would normally characterize banking as a sector, so the learning curve is steep and the options confusing.

The good news is, I finally feel like we are at the start of the journey. As a group we have accepted the need to reinvent what banking is for the future. It is confusing, but it’s sort of exciting in the same way.

What innovations will rock our world in the next 25 years? #Innotribe #SIBOS

In Retail Banking on October 23, 2010 at 07:33

As preparation for my SIBOS Long Now Innotribe sessions next week I’ve been talking to lots of geeks, thought leaders, bloggers and innovators about what comes next. This is by no means an extensive list, but here are a few of the disruptive innovations that are coming our way in the next couple of decades or perhaps sooner.

The end of content, the rise of data
As we have to deal with more and more content, data and stuff coming our way, we’re going to have to treat all content as data and start to manage, curate and aggregate the stream. There’s a bunch of interesting initiatives at the moment that are starting to have a shot at this like Flipboard (which I love), My6sense, Google’s priority inbox. But one thing we know is that we will increasingly need help to manage the massive amount of data we’re receiving. Ultimately, I’m going with the concept of an agent avatar that acts as your proxy in collecting, filtering, and prioritizing your data. Your agent would also be contextualizing content and recommending actions or strategies based on context, behavior, location, etc.

The network of things
Your fridge, kettle, oven, airconditioner talking to the internet? Why? The network of things and the man-machine interface is more about integrating ‘things’ more seamlessly into our lives than having a fridge you can surf the web on. The fact is that if you look at our TV today, it actually makes more sense for your TV to get content from the web, than from cable or the airwaves. It makes more sense for your radio to do the same. This is because increasingly the ‘data’ will be tailored to our needs, wants, habits, etc. So our car, our home, our devices will interact with us more efficiently due to this connectivity. For example, your car’s nav system will know where you have to drive because of the appointment you just made on your iPhone 7…

Use of cloud
Ok, so we are hearing lots about ‘cloud’ computing these days, but the cloud will be about the computer disappearing. The fact is that a laptop or desktop computer as they become increasingly mobile, will morph into something else. It won’t also be necessary to have supercomputer-like power built into your handheld device, because by accessing the cloud you’ll have access to supercomputing power without needing it in the device. A good initial example of this is dragon dictate who have an iPhone app that uses the cloud to process your speech to text, rather than loading all that goodness on the device locally.

We’re seeing a lot of thought being put into design today. Apple is a great example of an organization who gets the need for great design. More than that though, we’re thinking about designed intelligence, behavioral economics, usability, ethonographics, and more. The next 25 years will be about simplicity and great design. Complexity is not valued in world that tends towards greater complexity.

Augmented reality, Geo-location, No more log-in, no more check-in, just connected – these will continue to be the driving force of mobility in the short-term. Right now we are probably seeing the beginning of the next ‘dot com’ bubble if you like. But this time it is the intersection of mobile devices, social media, augmented or enhanced reality, geolocation services, and the web of things. The mobile device is at the centre of all of this activity – because whatever we end up with, we’ll be doing it on the move.

Energy production and storage
We need better batteries, faster charging, less impact to environment, domestic closed-loop systems – essentially we are looking for cheaper, more abundant energy, with a much lower impact to the world around us. Battery technology needs to dramatically improve, maybe through the use of fuel-cell technology or similar. But we need more POWER scotty!

Nanotech and manufacturing
Nanotech and materials science will bring us lighter, stronger, intelligent materials. We’ll find new uses for exotic materials. We’ll build devices, buildings and environments that we could only imagine. We might even go mining landfill for all the precious metals that are still down there.

Disintermediation or changes in government and big business
As cash disappears the state will move to tax or collect off the transaction, rather than your income. But as we become more networked, interactive, and collaborative, it will be impossible for government to manage the ‘spin’. So what happens? Doesn’t government shrink? Does government really become by the people for the people? Good questions. In the networked world, big is not necessarily better. Fast is the key measure of success, not size.

Personalized medicine
Personal Genome or Bio-Mapping will be a feature of the next decade. Instead of going to the doctor to get a broad based solution, we’ll start to understand how the unique immune system of an individual reacts, their biochemistry, their genetic tendencies and markers – this will be a future where (those who can afford it) get tailored, personalized medical attention right down to the drugs we receive over the counter.

Also check out Ray Kurzweil in his TED talk on the ‘singularity universe’.

Banks and Credit Card Issuers beware – Apple just stole your business

In Customer Experience, Mobile Banking, Retail Banking, Technology Innovation on October 17, 2010 at 23:01

200 individuals were the first to receive credit cards issued by Diners Club in 1950, the brainchild of Frank McNamara. It was the start of a completely new era in personal credit and payments. American Express entered the credit business with its own card in 1958, within five years had issued more than a million cards.

Today there are more than 1.6 Billion credit cards in circulation, and the US credit cards industry generates $2.8 Billion dollars a year in revenue. One in 12 households in London (or 8 per cent) have used credit cards to pay their mortgage or rent in the last 12 months and outstanding credit card balances stood at £63.5 billion in November 2009. By 2013, China’s consumer credit market—encompassing credit cards, mortgages, and other personal loans—will account for 14 percent of profits in the banking sector.

Growth in Contactless Technologies

In recent times we’ve seen the move to NFC or Near-Field Contactless credit cards. It is estimated that NFC enabled credit cards will reach the tipping point in 2011, with a total of 30 million British contactless bank cards alone being issued by then. The ease of use of an NFC-enabled card is obvious, no swiping, no inserting. Steve Perry from Visa Europe said that the rising popularity of contactless technology brings the promise of a cashless society where there is no longer any need for people to carry notes and coins around with them.

“Contactless is as revolutionary as the shift to internet payments was five years ago. It will mean having no notes and coins – it will certainly mean having no coins. It will move us almost to a cashless society.” – Steve Perry, Visa Europe

But as the modality shifts toward NFC, the reality is that the physical card itself does not represent a competitive advantage or differentiation for banks or issuers, not that it does today. Once the move to NFC-enabled POS terminals is ubiquitous, it’s probably easier just to carry your phone to make payments than a gaggle of credit and debit cards. That’s not going to happen overnight though right? Cards as a product are still too strong to be replaced by mobile quickly, so we have plenty of time right?

It will happen quick…

WRONG. We know that Apple is working on an NFC-enabled phone, and given their recent hires in the space, it is assumed that the iPhone 5 will be the platform for this change. So how will Apple’s NFC-enabled iPhone 5 work? We know a few things about the likely capability of the phone based on the patents issued by Apple. Firstly, the payment application will be a core app integrated into the phone, there will be a biometric strip (presumably enabling fingerprint authentication) and the phone will ostensibly work just like an EMV-chip credit card.

Some of the detail of Apple's NFC patent for the iPhone

The question you are probably asking is, how will the payment mechanism work? Here’s where it is largely speculation because Apple is being extremely tight lipped. We know that the primary payment app will work as an interface to your bank or credit card company as you need it to. However, it doesn’t take a rocket scientist to work out that Apple could use its current iTunes store platform to provide stored value for an effective debit card mechanism. If Apple was to use this mechanism as the underlying currency or stored value behind their core ‘debit card’ equivalent payment capability, they would effectively become a bank overnight, and one with perhaps an even stronger differentiation than any other debit card on the market today. Other handset manufacturers and mobile platform providers would be sure to follow as Apple’s payment capability quickly becomes ubiquitous. That is, if the payment networks talk to Apple’s iTunes store…

Competing with Apple, Google and Microsoft Mobile

So how will banks compete in such an environment? Well banks can’t issue their own mobile phones like Apple or Google’s partners can, and plastic cards and checks look downright archaic in comparison to such a payment paradigm. The only choice of Card issuers and banks would be to embrace the new technology and scramble to partner with the handset manufacturers and mobile OS owners. Visa has already deployed their Visa Paywave solution on the iPhone, but currently you need a cradle or sleeve that the iPhone sits in to do the sexy NFC bit, that simply won’t be necessary on the new device.

So the question for banks in this new environment would be how do we now issue cards to customers? Do they have to come into the branch for us to configure their phone? Given how easy it is to upload iTunes credit, this would be a huge competitive disadvantage, so the compliance procedures applied to the current physical process of card issuance become a millstone around the bank’s neck and result in rapid disintermediation. Within the space of 3-5 years, banks no longer have a credit card business. Sure, they might eek out a small business settling payments between Apple’s iTunes store and the bank, but compared with the size of the card business today this would be miniscule.

Challenges Ahead for Banks

What about if a customer could download a new “credit card” from the iTunes’ App store, or from Google’s Marketplace? Well how would you qualify for the card as a customer, are there different card apps for each bank, what is the onboarding and risk assessment process?

Don’t be tempted to think that the protection of existing payments networks or a bank license will protect your existing business from such innovation. If Apple does launch their NFC phone and announces collaboration through Visa and Mastercard’s payment network, do you honestly think with millions of iPhone 5’s going out the door that the regulator is going to call a halt to payments from a phone?

Seriously, if you are a bank, it’s likely that in just 8-9 months you’ll be faced with competition from non-banks who can do the whole NFC-enabled phone payments thing much faster, easier and more compelling than you ever could by issuing a plastic debit or credit card. And guess what?

If you’re the CEO of a bank, you probably don’t even have someone appointed to work on mobile credit card onboarding yet, so what’s the likelihood you’ll be ready to compete?

Let’s try plan B – let’s go to the regulators and see if we can stop mobile phone payments as a mechanism shall we?

Coffee Shops as an economic indicator for innovation

In Technology Innovation on October 15, 2010 at 07:54

spend a lot of time in coffee shops writing these days. I don’t know why, perhaps many of you have experienced this, but I seem to have a very productive time writing when there is the smell of fresh coffee, the sound of cappuccino machines and the white noise of the coffee crowd to add to the ambience. Sometimes this environment triggers a burst of creativity that is second to none on the productivity front. My wife tried to fight this tendency for a while arguing that it was all in my mind and I could be just as effective at home sitting quietly in my office, but we’ve since come to an understanding on this matter. Besides – caffeine is a big part of my success at this juncture in my life.

I must not be alone in this, because the so-called “coffee culture” effect has been measured in many economies and can be seen as directly contributing to growth in both economic terms and in relative growth in the retail sector. However, there is an additional element here that I’ve noticed as a leading indicator of an economy’s capability to absorb innovation.

In 2007 in the UK McDonald’s announced that it was going to provide free WiFi in it’s ‘family restaurants’. The US, Australia and many other countries soon followed and by January 2010 most of McDonald’s network in developed economies globally is already wired for WiFi. McDonald’s figured out early that this was an easy win-win. Customers are increasingly dependent on WiFi access as they move around and if you provide this, it becomes a key driver for their decision to visit your store or outlet. Starbucks in the US has also realized that free WiFi is a big draw for customers.

Even McDonald's has free WiFi

Since the launch of BANK 2.0 I’ve been visiting many countries to speak on the future of banking, and I’ve seen a direct correlation between the progress of an economy as regards innovation and integration of WiFi in the local Starbucks or coffee chains.

Take Australia for example. The Australian dollar is at an all time high against the US Dollar, potentially about to reach parity. Since the 1980s Australia has long held an extremely competent ICT industry capability, but this has been somewhat threatened by an ongoing exodus of many of the most talented resources often leaving for overseas opportunities (the so-called “Brain Drain”) due to high taxation and lack of career growth locally. Australia’s net permanent gain in immigration is still strong, but over time this effects the skill mix in innovative industries.

How innovative is Australia though from a global perspective? Research and Development is a dwindling segment in Australia. Long ago the government dismissed or made tax-breaks for R&D so difficult to attain that Australia has lost any competitive positioning it had in this respect. Certainly in respect to industries like software, telecommunications, internet start-ups, mobile platform development, Australia just doesn’t have the capability to compete with many other countries like India, China, Hong Kong, Singapore, Korea, United Kingdom and Northern Europe.

So back to coffee shops. Today as I was walking around the CBD of Sydney, my goal was to find a coffee shop where I could relax for a few hours and get some blogging, writing, online research and emails done. My primary criterion for this was great coffee (which is not hard to find in Sydney fortunately), a comfortable environment and free WiFi. I tried 5 different coffee shops around Pitt Street and George Street before I finally succumbed to a Starbucks where I could pay for my WiFi with Skype credit instead of having to purchase an annoying, overpriced voucher for 10 minutes access at a time.

Here’s the thing – maybe the reason I can’t get very basic, coffee shop WiFi infrastructure in Australia is because Telstra still largely maintains a monopoly in Australia, maybe it is the fact that coffee shops are concerned about attracting droves of students who don’t drink enough coffee (yes I was given this excuse), or maybe it’s just that as an economy Australia doesn’t get the need for innovation to be about the philosophy of being connected. WiFi is like water these days – it is a basic commodity, or at least it should be. You can’t hope to drive innovation by stifling basic access to a resource that enables connectivity, curation, publication and collaboration.

10 days ago I was in Cairo, where I visited two separate hotels where Internet Connectivity through WiFi and broadband was provided free. The hotels I’ve stayed at in Australia this week have charged me A$29.00 a day for in-room or WiFi internet access at the hotel, and while in both Melbourne and Sydney I struggled to find coffee shops that had any WiFi capability, let alone free WiFi. In Hong Kong, my mobile provider provides me with unlimited wireless broadband internet access for free with my mobile account and WiFi is readily available wherever I go.

Why in some countries is such a basic ‘fuel’ of the innovation cycle still being used opportunistically by a cartel of organizations trying to eek out a small fortune in overpriced service fees? If leaders of industry and government don’t get this and in your economy today you still can’t get easy access to free WiFi in major cities, I contend that this is a leading indicator of the economy’s ability to absorb or adapt to innovation opportunities. If you still find yourself struggling to get decent WiFi in your city and your in the innovation space…you might consider relocating to an economy who gets the big picture.