Brett King

Archive for July, 2011|Monthly archive page

The Total Disruption of Bank Distribution – Part 4

In Branch Strategy, Engagement Banking, Future of Banking, Mobile Banking, Retail Banking on July 26, 2011 at 06:48

The Widening Gap between Behavior and Capability

In 1980 the average bank in the developed world would receive a visit from a customer once or twice a month, making an average of 20-25 times a year. As ATM machines started to emerge, by the end of the 80s average branch visits per customer were already starting to level off as the primary reason for visiting the branch – to get cash – was moving to the ATM.

In the early 90s to combat this decline in visitation trend banks started to create specialist branches around High-Net-Worth-Individuals, and seek to attract the most affluent and profitable customers back to the branch. This strategy was successful in attracting new and highly profitable customer segments stimulated by loyalty programs, specialist branches and better service, but could it last?

Internet Banking Disrupts Banking Behavior

The reality was that it wasn’t until around 2006 that Internet Banking fully reached its potential as a disruptor. By 2006 the trend for Internet Banking adoption had become very clear, it was ready to overtake the branch as the preferred method of day-to-day banking. Between 2005 and 2009 Internet Banking usage doubled, and across the United States, UK and throughout most of the EU, Internet banking emerged as the leading channel for day-to-day access to banking services.

The perception reinforced by some within the retail banking set was that this emerging behavior around Internet Banking was isolated to newer generations of customers only, and that older, more established customers were still keen to have the personal experience of a face-to-face interaction, or that customers seeking to start a relationship would always opt for the richer experience of the branch. However, the data did not bear this out. The earliest adopters of Internet Banking turned out to be the time-poor, affluent HNWI segments who valued their time over the upside of a branch visit. They could afford computers, the fastest Internet connections and had a strong incentive to use iBanking – they sought convenience and time saving.

In 1985 70% of transactions occurred through physical artifacts and networks, namely Branches, Cash and Cheques. By 2010, however, 75-90% of retail banking transactions were processed through Internet, Call Centres, Mobile Devices and ATM machines. Today branches make up at best around 5-13% of total transactional traffic, and that is on a good day. As a result, branch staff are poorly motivated and in many markets staff turnover is toping 40% annually. The average customer is now visiting a branch in the United States less than 5 times a year, in some EU markets the average is less than half this number. This is resulting in massive closures of bank branches. That number doesn’t get better if you look at it another way – it’s just bad news for branch focused brands.

RBS is closing 55 branches this year, this is the behavioral effect

In 1990 11 million cheques a day were written in the UK, by 2003 that figure had ballooned to 36 million cheques a day. By 2010, however, Internet Banking had caused that figure to crash dramatically to less than 1 million cheques per day. Why? Behavior has irreversibly changed. What used to be second nature to many is now a dwindling holdover for an ever shrinking demographic; those who hark back to the days of good old fashion banking.

What happens in the next 5 years?

Today we’re seeing mobile banking take off as the fastest ever growing channel for retail banking services. Today some banks are reporting a 300-500% faster adoption of Mobile Internet Banking than what they saw with Internet Banking. Rather than take traffic away from Internet Banking, the trend is for mobile banking users to actually increase their use of Internet Banking.

So what’s more likely in the next 5 years? Is it more likely that customers will suddenly, spontaneously buck all these trends and spontaneously start using branches more, or will Internet and Mobile simply increase their march of dominance for day-to-day banking? The answer is obvious (to most).

Why, then, do branch networks still command the massive bias in funding that they have today within retail banking P&L, and why do leaders in the digital space struggle for board-level attention and legitimacy?

It’s not about Internet vs Branch, it’s about behavior

We’re not going back to vinyl records, the telegraph, or steam powered transport – we’re just as likely to go back to a banking system dominated by branches and cheques. This is an undeniable, statistical truth. The majority of us now (over 50% in developed economies) are simply too busy to drive down the branch, find a parking spot, stand in line for 15-20 minutes, to hand over the counter a cheque that will take 3 days to clear for a nominal processing fee. But it’s not just transactional behavior that takes the hit.

Today if I’m looking to start a new relationship with a bank, the first place I go is to my search engine, and possibly my social networks. Admittedly there are still some who will seek to visit a branch to kick off a new relationship, but after that initial visit my day-to-day banking becomes pure utility and convenience. In 2007 when I worked on a global survey for Standard Chartered, 75% of customers in 42 countries said that Internet Banking capability was their primary criteria for deciding on a new banking provider. Regardless of whether I might come into the branch to get started, the fact is you aren’t going to be seeing a lot of me. That’s not the way I behave anymore.

By continuing to favor branch from a channel investment perspective or organizationally from a strategy perspective, and by insisting on multi-year business cases before making real investments in mobile, social media and web, we are opening up a gap. This gap is a behavioral gap between how our customers behave everyday, how they want to bank, and how prepared “the bank” is to facilitate their needs. This gap can easily be exploited.

The more banks insist on me conforming to their behavior and processes, the more I will feel the bank is irrelevant, out-of-date and a poor match with my needs. I’ll start to find workarounds like PayPal for transfers, or Prepaid Debit cards for day-to-day billing and payments. I’ll start to move my cash to other banks that have a mobile banking and iPad App.

There are many who will argue that this is not enough to kill the branch – I say you won’t be able to afford not to kill them off yourself very soon.


The Total Disruption of Bank Distribution – Part 3

In Bank Innovation, Customer Experience, Future of Banking, Technology Innovation on July 12, 2011 at 07:37

Massive spend on innovation at the front-end of retail financial services

Putting aside conjecture of whether or not we are in a bubble at the moment around tech, social media, and mobile services (which I believe we very well could be), the reality is we are seeing a flurry of massive investment in new distribution models and organizations acting as either technology or behavioral enablers. We’re used to seeing big numbers for M&A activity in banking, but we’re not used to seeing such a flood of start-ups and non-traditional competitors facing off against traditional players at the retail side of the business.

In just the last 3 years there has been more than $7Bn in private equity, venture capital and private investment made into non-traditional financial services start-ups that challenge existing models. This is the first time globally that there has been this scale of challenge to the traditional retail financial services space from start-ups in the technology arena. To illustrate the level of activity, here are just a few recent investments in the New York fintech space alone (source: Quora):

SecondMarket ($15mm)– marketplace for illiquid financial instruments;
Kapitall ($7.3mm)– discount brokerage with gaming elements;
Betterment ($3mm)– online brokerage for small investors;
Plastyc ($2mm)– mobile based banking for the underbanked;
AxialMarket ($2mm)-
online middle market i-bank;
BankSimple ($3mm)- online/mobile banking interface;
Covestor ($11mm)- platform to find SMA providers and invest with amateur traders;
Hedgeable next generation investment management firm;

However, in addition to these plays you have very some serious initiatives now doing major business in the space that used to be considered the sole domain of ‘banks’. Here are four examples:

Personal Financial Management

Mint was acquired by Intuit in September of 2009 for $170m. Mint has experienced meteoric growth in customer base. Today Mint has more than 5m customers willingly giving their personal financial data, bank account and spending information to receive the benefits of fine tuned recommendations for financial services investments and credit products.

Businesses like SmartyPig, which has a collaborative play with the industry, are very successful at stimulating simple behaviors like savings for specific goals. SmartyPig has raised over $1.2Bn in deposits for the partners banks it works with such as Citi, West Bank, BBVA, ANZ, etc. They utilize social media to encourage your friends and family to assist you in your savings goals. For example, my kids were able to use SmartyPig to solicit assistance from their grandparents, uncles, aunties, etc to help with their savings goal.

Admittedly, we also seen Blippy and Wesabe crash and burn in recent times. However, the readiness of the investment community to experiment in the space of services that are complimentary or competing directly with traditional FIs is clearly increasing.

P2P Lending

Lending Club, Prosper and Zopa are just three examples of recent successes in the P2P lending space. Lending Club is lending around $20m a month in loans, and have lent more than $300m, with an average loan size around US$10,000. In France, FriendsClear has recently announced that Crédit Agricole will be joining their efforts in a collaboration of sorts; exactly how this will work is still under wraps.

Zopa has lent more than £150m which means they are now approaching a 2% market share of the total UK retail lending market. Zopa’s average loan size is around GBP 5,000, but what is more significant is their Non-Performing Loans (NPL) ratio. Major U.K. banks typically recorded NPL ratios in the 2%-3% range from the mid-1990s through to 2007, but by the end of 2009 Lloyd TSB’s gross NPL was as up to 8.9% and HSBC’s hovering around 3% (source: Standard and Poors). So how did Zopa perform in this environment? Zopa’s NPL ratio sits at around .9%. That’s 10% of Lloyds and 1/3rd of the best bank in the UK HSBC!

Zopa's NPL Ratio is 10% that of Lloyds TSB in the UK

So how is it that a social network that lends money between its participants is better at managing loan risk than banks that have been at this for hundreds of years?

The key here is the positive psychology of social networks versus banks. If I lend money off a bank and I’m having difficulty paying that back due to loss of income, or just having a hard time making ends meet, I’m likely to let the loan slip and wait for the bank to chase me. P2P networks like Zopa, on the other hand, are finding customers proactively contacting them to make payment arrangements when they can’t meet their monthly commitment. Why?

Firstly, there are people at the end of the loan – not a big bad bank who “can afford the loss”. Secondly, the fact that there are people at the end of the loan versus a bank means that people are more inclined to prioritize paying back their loan to other people, over that of a large institution. This positive peer pressure is producing astounding results. I also asked Giles Andrews from Zopa about why he thought Zopa was better at managing lending risk than banks…

“I think our low defaults aren’t just because of P2P but because we built a better credit model, taking more account of over-indebtedness and affordability than banks”
Giles Andrews, CEO,

Who would have thought that social networks would be better, safer, and more efficient at lending than retail banks?

In fact, P2P lending has been so successful that in recent times both Umpqua Bank and Fidor Bank (a start-up online, direct bank in Germany) have incorporated some P2P as a component of their bank platforms. Why take all the risk yourself as a bank, when some customers are willing to cover the risk themselves? But don’t think that P2P is just easy money. Wall Street Journal reported in June of this year that 90% of Lending Club’s applications were refused.

Maybe that’s why P2P is good business – because they actually take fewer risks than banks?

Pre-paid debit cards, E-Money Licenses and Payments

Amex, Greendot, NetSpend and Walmart are just three organizations that have recently made big pushes into the prepaid debit card arena in the US alone. Significantly, the US now has 40-60 million underbanked consumers (source: FDIC, Financial Times), half of whom have college degrees, and 25% of whom are prime credit rated. Many of these are opting out of the traditional banking system, but carry a pre-paid debit card. The pre-paid debit card industry will account for more than $200 Billion in funds by the end of 2011 along (source: Packaged Facts).

Top 5 reasons people get a prepaid Debit Card

The financial crisis has accelerated the increase in those whom no longer participate in the formal banking system. Since the financial crisis 60% of new mobile phone users in the United States have been no-contract, pre-paid phone users.

“As an economy becomes richer and incomes rise, the normal expectation is that the proportion of the unbanked population falls and does not rise as is now happening in the United States…”
Washington Post, December, 2009

Combined with increased account fees from big banks recently affected by reduction in interchange revenue, and modality changes, I think we can expect that increasingly customers who don’t need complex banking relationships will opt out of the banking system by using prepaid debit cards and in the future prepaid wallets enabled via NFC and mobile Apps.

In the UK Google, O2, BT and others are looking seriously at the combination of prepaid debit cards type functionality into a wallet. Google already launched their Google Wallet earlier this year, and we can only see more and more of this action in the coming months.

The raft of P2P payments, mobile payments and mobile enablement are bewildering at the moment. Undoubtedly, we’ll see many variations of mobile payments in the near future. With PayPal predicting $3 Billion in mobile payments in 2011 alone, the future of mobile-based prepaid debit cards looks very healthy.


We’ve never had such a concerted, technology-led explosion of retail financial services solutions that are directly in competition with the traditional players in the space. While some of these initiatives are complementary, increasingly we’re seeing startups that realize you don’t need a banking license to play on the fringes of the banking system. When you only know one way of running your business you will be increasingly challenged by customers who don’t relate to the questions you ask, the processes you have in place, and the insistance on using outdated physical artifacts and networks.

This is the first time we’ve seen a global attempt at reinventing the way banking fits into our lives on a day-to-day basis, and it is bound to create massive friction for a sector known to be very attached to traditional modes and models. One thing is clear, increasingly banks will be competing with new businesses that are faster, better, more relevant and aggressive than the long-held bastions of traditional savings and loans.

These businesses will embrace and exploit changing modality. These businesses will love disruptive customer behavior, they’ll encourage it!

The Total Disruption of Bank Distribution – Part 2

In Bank Innovation, Customer Experience, Future of Banking, Internet Banking, Mobile Banking, Technology Innovation on July 7, 2011 at 05:30

Rapid Acceleration of Technology Adoption makes change easier

The rate of diffusion is the speed at which a new idea spreads from one consumer to the next. Adoption is similar to diffusion except that it also deals with the psychological processes an individual goes through, rather than an aggregate market process. Since the late 1800s the rates of technology adoption and diffusion into society have both been steadily getting faster. While the telephone took approximately 50 years to reach critical mass, television took just half that (around 23–25 years), cell phones and PCs about 12–14 years (half again), the Internet took just seven years (half again), the iPod 3 years (half again) and Facebook was able to reach 200 million users in just over 1 year.

A very real part of the acceleration of technology is the application of Moore’s Law, named after Gordon Moore one of Intel’s founders and the individual credited with inventing the integrated circuit. Since 1967 Moore’s Law has predicted that every 2 years the power of a chip will double in processing capacity/speed. That means that the iPad you get in 2 years time, will be twice as fast as the one you have now. To illustrate Moore’s Law the 1Ghz chips now powering smartphones and tablets are exactly 1 million times the speed and capability of the Apollo 11 guidance computer that took Neil Armstrong and Buzz Aldrin to the moon.

Ultimately, this means that consumers are now adopting new technologies and initiatives such as the iPad and Facebook en masse in a period measuring months, not years. As we all become used to this rapid technology improvement, it is taking us less time to adopt these technologies into our lives, and this further increases the magnitude of impact on business. Let me give you an example of how this impacts banks specifically.

Internet versus Mobile Banking

The web launched in 1994, but most banks didn’t understand the significance of the web and lagged in the provision of Internet Banking services, waiting until 2000 or 2001. That’s 7 years from the start of the commercial web to the launch of Internet Banking for most banks. The iPhone launched in July of 2007 and in doing so created the market for “Apps” and increased our expectation of mobile interactions. Within a year more than 1 Billion Apps had been downloaded from iTunes, by 2010 that number had exceeded 10 Billion downloads. As a bank, ask yourself whether you could successfully argue for delaying the deployment of a mobile banking solution until 2014; 7 years after the iPhone’s release? Unimaginable.

Mobile Internet Banking is being adopted 300-500% faster than Internet banking was adopted, mobile payments will be even faster again. Thus, if you’re a bank, by 2015 your #1 channel for day-to-day retail banking will be Mobile, then Web, then the ATM, then Call Centre, and at #5 Branch.

Isn’t it ironic that banks today need to ask Google and Apple for permission to allow customers to access their bank through a mobile App? Today, some 17-year-old developer can develop an iPhone App in 2-3 weeks that would rival what it takes a bank 9 months to deploy. We’re increasingly going to find ourselves playing catch up, especially when it comes to new customer experience on devices like the App Phones, Tablets, etc.

It has long been argued that a face-to-face or human based interaction is vastly superior to that of a technology one. There are two issues that undermine this school of thought. Firstly, regardless of whether a face-to-face interaction might be better for a customer, increasingly we’re opting NOT to go the face-to-face route in favor of the simple convenience and utility afforded by technology. Secondly, with the incredible advance in recent times of customer experience, persuasion and interaction design, and the application of usability sciences, the fact is that technology is now competing head-to-head with traditional approaches to customer engagement, and winning.

So what comes next?

The use of gesture-based interfaces such as Oblong’s TAMPER and as demonstrated by various XBox Kinect hacks show that technology is becoming more natural, more intuitive. Image recognition technologies are now allowing digital signage to recognize whether you are male or female, happy or sad, and respond with a real-time offer accordingly. Avatars and voice recognition technologies are being combined to create customer support response systems that are act like a human agent, but are effectively IVR 2.0s.

Itautec's 3D gesture-based ATM and SapientNitro's Happy Smile Ice Cream Vending Machine are two simple examples of rich device experiences

Today, PayPal allows us to transfer money using a mobile phone number or email address, as compared with a routing number, ACH number, SWIFT code or account number, and in doing so provides a vastly superior person-to-person transfer process, especially when compared with a unwieldy branch experience. Very soon even cash, plastic and cheques will be succumb to the mobile phone as P2P and NFC become the norm – not because of technology, but because it is simpler and more convenient. Just as Internet Banking is the preferred channel of choice today.

Banking Everyday, but never at a bank

More than improved interaction is happening though. Social media, geo-location services, augmented reality, and predictive analytics, are forcing us to think about the application of banking and other services contextually. Banks are going to have to offer banking when and where you are, not force you to the branch or the bank’s website as the sole choice of applying for products or services. Banking will be something you do everyday, but not at a bank. Banks won’t be able to compete unless they can fulfill in real-time, as consumers need the product or service that is ‘banking’.

Regardless of what you think of the service proposition of a branch versus multi-channel technology, the fact is, it’s all going to be about context, relevance and delivery. Branch just won’t be able to compete long-term with such expectations driving the experience. Change will happen because you simply can’t defend traditional approaches that turn out to be inferior to the customer experiences that are emerging through technology.

The Total Disruption of Bank Distribution – Part 1

In Bank Innovation, Branch Strategy, Future of Banking, Media, Mobile Payments, Retail Banking, Strategy on July 5, 2011 at 13:13

There’s a philosophy I characterize as “Lucky to be a customer” within banking today. A customer comes to the bank, we make him jump through hoops we often call risk assessment, customer profiling or KYC, and then maybe, if they are not too risky a proposition, we might let them be our customer.

This philosophy comes not from a monopoly play as a brand, but an exclusive club we call “banking” where the barrier to entry has been so significant in the past that there has been limited pressure to change on the traditional modes of banking. This is evidenced by the fact that although in rapid decline, much of the world still sees cheques lingering as a popular form of payment, despite being roughly two thousand years old and hopelessly antiquated in form and function. The basics of branch banking haven’t changed in the last millennia either. It is very rare for a physical artifact like cheques or a distribution model to retain such dominance over such a long period of time. The normal process of iteration, competitiveness and technology improvement results in more frequent change at the front-end for other industries.

It is not difficult to understand then why bankers, when faced with talk of the threat of ‘disintermediation’ or rapidly changing distribution models, meet such with practiced skepticism. There’s still bankers today who doubt the future of NFC mobile payments, of social media’s impact and of a fundamental and dramatic reduction in support for physical branch network.

So what evidence is there that we face a fundamental shift in the way we do our banking, the way we handle payments, or deal with financial services and will this significantly affect the way the business functions moving forward? Or is it more realistic to posit that we are simply seeing a change in mix, with the fundamentals of banking too embedded into our day-to-day life to really change in a major way?

I’d like to propose the following lines of evidence for a major and disruptive shift in modality when it comes to bank distribution models:

  1. History shows incumbent players rarely win out
  2. Rapid acceleration of technology adoption makes change easier
  3. Massive spend in innovation at the front-end is occurring through disruptors
  4. The increasing gap between behavior and capability, and
  5. Transparency challenging revenue and friction

I will warn you that this is an extensive analysis as compared with my usual read-over-breakfast blog post, but given the importance of this debate I think it needs a thorough analysis and review. Over the next two weeks I will provide a detailed analysis on each of these lines evidence, starting with historical precedents. The impact of these changes will be a complete disruption in the distribution of retail financial services in the next 5-10 years. The following is the first component of the shift that is forever changing the retail financial services sector.

1. History shows traditional incumbents rarely win out

In industries where a virtual monopoly of infrastructure exists, change normally occurs over a long period of time, but when it does it is a typically through a tipping point scenario. Traditional players are not afforded any protection by means of their existing infrastructure or distribution model when a new and improved core technology emerges, or a massive change in consumption behavior takes place. Here are a few examples of massive, disruptive change in long-established, traditional industries:

Telegraph to Telephone to Mobile

To understand the disruptive nature of a massive shift in technology adoption, let’s look at Western Union. Western Union today is a financial services organization, but back in 1855 Western Union was a company that provided Telegraph services. Inflation adjusted, Western Union was capitalized at US$830 Million dollars ($41m actual) in 1876. By 1900 Western Union operated a million miles of telegraph lines and two international cables.

Western Union’s greatest threat came from a new technology, the telephone. Alexander Graham Bell patented the telephone in 1876, initially referring to it as a “talking telegraph.” Bell offered Western Union the patent for the telephone for $100,000, but the company declined to purchase it. Western Union could have easily gained control of AT&T in the 1890s, but management decided that higher dividends were more important than expansion. By 1900 the rise in telegraph traffic had slowed, and by 1930 the number of net messages was in decline. By 1909, AT&T had already gained control of Western Union by purchasing 30% of its stock.

Over the past decade, the impact that mobile phones have had on the use of landline telephones is equally as disruptive. In June of 2010, the National Center for Health statistics stated that one out of every four Americans has given up their landline phone and are now using their cell phone exclusively. AT&T reported a 7.4% decline in landline usage in 2007, and 9.7% in 2008. Verizon reported a decrease of 10.9% in 2009, while Qwest Communications had a 17% decrease in landline usage from March 2006 to March 2008. AT&T and Verizon dominate this industry, which brought in $340 billion in 2000. By 2016, revenue is projected to have fallen more than $200 billion in 16 years.

Who dominates the new space? Mobile operators. Not telegraph companies, or fixed line operators. Owning the wires or physical network infrastructure is not enough to save your business from changing behavior. Owning branches and payments infrastructure is the same thing. Consumer behavior trumps outdated networks.

In the midst of this you have defining moments around mobile platform too. You have Nokia usurping the #1 mobile player of the 90’s Motorola, and then iPhone doing the same to RIM and Nokia. Consumer behavior is the killer app – literally. It will kill your business every time unless you move with it.

Encyclopedia Britannica vs Encarta vs Wikipedia

In 1993 Microsoft launched the $99 Encarta encyclopedia. In 1991 Encyclopedia Britannica was doing sales of $450m a year (valuing the company somewhere north of US$1.5Bn), but the effect of Encarta on Britannica’s sales meant that the company was sold at a fire-sale event in January 1996 for just $136m to Jacqui Safra (a Swiss Billionaire financier). In 1991, a bound volume of Britannica sold for around US$2,000 with a $600 commission component going to door-to-door sales professionals distributing the publication. Today that sales force does not exist.

In 2009 both Encarta and Britannica were offered online in a limited form, for free, due to the impact of Wikipedia and Google itself. Search and content curation has replaced the traditional Encyclopedia. Owning traditional distribution networks was of no value in the end due to the shift from physical to digital artifacts. Even owning the content is of marginal value in the end because the fungible value of the raw content versus the collective consciousness of the living, breathing stream is not comparable.

Music, TV and Books

Today the biggest seller of books in the United States is Amazon. The biggest distributor of music is Apple. If I told you this 10 years ago it would have been unthinkable. A computer company selling Beatles Albums? Are you crazy??

“I think in five years, other than a few specialist booksellers in capital cities we will not see a bookstore, they will cease to exist,” Australian Senator Nick Sherry
The Age (14th June, 2011)

Borders, Blockbuster...who's next? Banks?

This shift in distribution powerbase has resulted in a complete disruption of the traditional music and publishing industry. Record labels, movie studios, booksellers, video rental stores, and others who relied on physical distribution models have been decimated. Borders, Blockbuster, MGM, countless newspapers, video post-production companies, and photofinishing facilities have simply been hammered by changing consumer behavior. It turns out that in 2010 65% of young people under 30 have turned to getting their news from the big bad Internet. No amount of wishing it isn’t so, lobbying congress, or trying to beef up regulations to protect existing businesses is going to save these dinosaurs.

IBIS World recently reported on dying business models and in respect to video rental and distribution it was quoted as saying, “price- based competition and ease of access has transformed the once-a-week Sunday night family movie session into an everyday possibility.” It’s not just Netflix either. We are downloading more and more content and abandoning the old habits of watching a show on a specific channel at a specific time. We watch content, not channels or networks.

So what does this do for TV?

Free-to-air TV itself is unlikely to survive, because the Ad revenue based model no longer works if you aren’t watching Ads as you fast forward through recorded content via your DVR or TiVo. While content might be able to make the shift to digital distribution, increasingly the model of 15 mins of TVCs every 1 hour of programming no longer works. How will you acquire customers and build brand when these broadcast methods of advertising no longer deliver ROI?

Next … The Rapid Acceleration of Technology Adoption