Brett King

Posts Tagged ‘bank’

Will the US be last in the drive towards a cashless society?

In Economics, Future of Banking, Mobile Payments on September 1, 2011 at 23:50

Although it is a long-time off yet, we can now envisage a time when most of the developed world, and indeed most of the developing world will no longer deal in hard currency. There are a number of drivers for this:

1. Impact of mobile payments
2. Tighter money laundering requirements, and
3. Cost of physical handling versus electronic transactions

Since the mid-20th century many have heralded the impending cashless society, but it may be that the emergence of mobile payments is the final tipping point in that outcome. Indeed, empirical evidence is already available that cash is in serious, if not terminal decline.

Strong incentives

For years regulators and governments have worked to track the movement of physical currency across border, and in the case of terrorist financing and criminal activities. The Financial Action Task Force developed 40 core recommendations in 1990 (revised in 1996) designed to reduce the risk of money laundering, but the greater part of the effort was focused on the movement of hard currency and it’s role in criminal undertakings. The reason for this is that it is harder to track currency, and if it can move freely around the system, the criminals, terrorists and “evil doers” can support their activities without restraint.

The strongest case for the removal of cash is around criminal activities. David Warwick posted an excellent review of the issues around cash and it’s active involvement in crime in a recent post entitled “The Case Against Cash”. In it he cites the following facts:

“Now consider that low-level drug offenses comprise 80% of the rise in the federal prison population since 1985 (though those numbers have begun to go down in more recent years)…The vast majority of those illegal transactions are cash-based. Greenbacks are also the currency of choice for Mexican drug cartels, which funnel between $19 billion and $29 billion in profits out of the United States annually, according to the U.S. government.”
David Warwick, CBS Interactive Business Network, Aug 2011

The biggest costs and risks are in cash

In recent times in places like the Netherlands, the cashless society has already started to become a reality. In 2010, the Amsterdam City Government moved to create ‘cashless’ zones in the De Pijp and Nieuw-West (New West) districts as a result of rising crime rates. You can now only use Chip and Pin to pay in those locations. This has been successful enough that it is now being rolled out across other districts in Amsterdam.

In Ireland, Belgium, Netherlands and other locations, banks are increasingly going cashless to reduce costs and crime. In recent years banks like SNS Bank in Utrecht and National Irish Bank, were two such European banks to commence the move to Cashless. Both cited the rising costs and risks of dealing with physical cash, and low volume of real ‘cash transactions’ in-branch, as a metric for justifying the move.

Emerging economies may be first

In the Philippines, Kenya, Somaliland, Nigeria, Senegal, India and other such locations, the success of mobile payments and remittances is starting to see a dramatic shift in the day-to-day operation of the economy. In Somaliland where there are no ATMS, and almost no banking infrastructure, mobile payments enabled by mobile operators, the hawalad and money changers, might mean this province could become one of the first cashless societies.

The key to moving away from cash, is reducing the reliance on cash day-to-day. RBA Governor Malcom Edy noted that cash use in Australia had declined from 40% down to 30% of traditional ‘retail’ payments. In the UK, cash usage is also in decline, with the UK Payments Council estimating that it will represent just 0.8% of retail payments by 2018 (this is down from 90% in 1999). In both cases, the use of Debit Cards has been cited as the contributing factor.

In Rural India, Sub-Saharan Africa and the Philippines mobile payments are booming

It’s all about behavioral shift in payments

The shift towards cashless requires reducing momentum in the ‘cash system’ by shifting to alternative modes of payment. The Debit Card has been an obvious ‘cash-killer’ in places like the UK and Australia, whereas mobile payments have had a much more rapid and profound effect on emerging economies. So with Peer-to-Peer (P2P) mobile and internet-based payments rapidly accelerating, and the move to NFC payments – the likelihood of ‘saving’ cash from terminal decline looks less and less likely. Check out PayPal’s P2P solution using NFC enabled Android phones for example.

In this regard, the EU with it’s strong support for debit cards, chip and PIN and increasing mobile enablement, and the emerging economies of Africa and Asia with both low friction against cash and the pressing need for financial inclusion, probably mean that the US, who is so strongly and emotively married to the ‘greenback’ and stuck with outmoded mag-stripe will likely be among the last to go largely cashless sometime in the next decade.

The momentum for these changes are building and it is a longer-term trend that will change the way we view banks and money in the very near future. The more friction you have, the more consumers will find workarounds. At the end of the day, a mobile or P2P payment will have far less friction than a cash payment.

Private Banking 2.0

In Bank Innovation, Customer Experience, Future of Banking, Social Networking, Strategy on April 6, 2011 at 02:24

Since the emergence of online banking there has been a fundamental assertion from high-net-worth bankers that their clients aren’t digitally focused, they don’t use social media or mobile banking, and that they prefer to pick up the phone and engage their banker because the nature of their interactions is defined by their wealth – they want the highest-level of service that only comes from engagement through a personal banker.

Is this business immune to disruption, despite the rest of the retail bank being in an extremely disruptive state? It’s apparent that Private Banks are now seeing customers move more frequently to multi-bank relationships because the basic digital hygiene factors within the Private Bank are not taken care of. For a Private Bank to claim that they are the best of the best, but to be amongst the worst digitally is contradictory.  So the depth of the relationship and scale of AuM (Assets under Management) are suffering because of lack of web, mobile and social capability, and Private Bankers are seeing a fragmentation of service offerings as a result of service perceptions.

If we look at High-Net-Worth-Individuals (HNWI), the facts are that they are extremely service conscious and generally loath inefficiencies. Entrepreneurs and successful business people in the HNWI category were the first to get Blackberry’s, the first to get wireless broadband modems so they could work on their laptop in the limo from the airport to the office or sitting in the Maybach running around town, amongst the first to get the cool new iPad or the latest gadget. So right now, clients of private banks are asking – why can I login and do this day-to-day stuff through HSBC, Barclays or BofA, but I can’t through my Private Bank?

So where does technology fit, and can it provide real value? Is there a way that technology can deepen relationships with clients, or does it mean that relationships are less sticky because they are doing more interactions with the brand electronically?

The digital relationship

Recently a well known ex F1 driver and commentator was spotted on Twitter asking his Private Bank, Coutts of London, whether they had a local branch in Miami. The Coutts team respond within just a few minutes of seeing that enquiry come past the Twitter account and letting the F1 driver know that his Banker would be on the phone to him in a jiffy. Such a response is not the norm.

When presented with this sort of scenario, many Private Bankers scratch their heads and ask why a distinguished client like an ex-F1 champion would use Twitter to talk to his Private Banker instead of a simple phone call? That’s not the point – you can choose to approach every single client and ask them why on earth they would want to use Twitter, or you can simply understand that an emerging channel like Twitter needs support.

As the next generation of Private Banking clients start to take over from their parents, the last thing you want is to be identified as that stodgy, old, out-of-date bank that my father used.

Stereotypes that Private Banking clients don't do Digital are just wrong...

Maximizing the client interaction

Perhaps the biggest revolution is in the primary face-to-face asset allocation meeting with the client. Over time we have gradually increased complexity as a result of KYC and risk, for what used to be a simple chat between a client and his banker. Now we load up our client with forms, risk profile questionnaires, with brochures, technical data, etc. that doesn’t actually enhance the relationship – it just complicates it.

Soon we’ll be asking the client to do the risk profiling stuff at home online and we’ll verify this with the client face-to-face. We won’t ask the client to fill out the same compliance information on a paper form that we’ve already asked for 20 times before, because we’ll execute electronically using the data we already have stored.

When we sit with them in a planning session, we’ll use tablet based tools that allows us to show our clients what-if scenarios and adjusted asset allocations that work better for them, then we’ll give them a selection of product decisions which they can learn more about at home online or execute electronically from behind the login. Why?

The real revolution here is in simplicity of the interaction. By maximizing time with our client for discussing their needs, and shifting other activities to supporting channels, we improve service levels. Even the humble monthly statement will be digitized with interactive components explaining market movements, the client’s net position and short-term investment opportunities.

Social Scoring

In respect to client acquisition, the world of transparency through social media will increasingly start to impact banks in the coming 2-3 years. Brands and private bankers will be anonymously scored online as to their effectiveness. Just like dating services, social networks will be able to match bank’s relationship managers with clients based on their expertise, location, and their ranking amongst peers.

When we search for Private Banks on Google or YouTube, what results will we see? We won’t any longer see the most popular brands, but the most respected brands amongst our peer group based on your social score. Unless you have a strong connection digitally with your clients, your social score is going to hurt you on the acquisition side of the business. After all, Private Banking is first and foremost about trust in your advisor – if my friends don’t trust and recommend you, how can I trust you?

Conclusion

Once thought immune to the changes in multi-channel engagement, it turns out that perhaps the most important clients in the retail banking marketplace need to be highly connected, to provide the required service levels. For most private banks, this is an epiphany and hence, we’re seeing aggressive investment in this space today.

If you want to be the trusted advisor – it is clear you need to be connected and recommended. Engagement is no longer limited to a phone or face-to-face, the private banker must extend his reach to clients at every opportunity. A deeper relationship, depends on context and connection – not just a brand and asset management capability.

The Three Phases of Customer Behaviour-led Disruption

In Book Excerpt on November 1, 2009 at 15:55

Excerpt from Chapter 1 – What the Internet and ‘crackberry’ have taught customers

There are three stages or phases to the disruption occurring within retail financial services. Each stage is disruptive enough to be a ‘game changer’. However, by the time the third phase impacts retail banking around 2015 (or perhaps earlier) the changes will be complete and irreversible.

The first phase occurred with the arrival of the internet. While many banks denied it at the time of the dot com bubble, the internet changed forever the way customers accessed their bank and their money. As we discussed in the psychology of customer behaviour, this gave them control and choice that was not available previously. Suddenly, customers were thrust into an environment where they could access their money as they wished, when they wished. As internet banking capability improved, the drive to visit the branch started to diminish and customers began to rely on the new channel as their primary access point with the bank for day-to-day transactions. Within just 10 short years, we’d gone from 50-60% of transactions either over-the-counter at the branch, through ATM or cash and cheques, to 90% of transactions through Internet, Call Centre and ATM. Game changing…

Embedded into this initial phase of disruption was also the emergence of social media and collective curation. As users started to participate in social networks, customers realized that these platforms had huge potential for empowering groups with common interests, or causes. No longer were brands protected by the corporation’s branding and controlled marketing communications, brands could be built up or obliterated at warp speed as a result of very public community opinion expressed through social media networks. While being a massive opportunity for banks, to-date very few have monetized social media because it is in conflict with the long-held philosophy that “if we want customers to have an opinion about our bank, we’ll give it to them”. That horse has already bolted.

The second phase is occurring right now. The emergence of the smart device such as the iPhone and Google Android enabled phones, is a driver for portable or mobile banking. While many banks may argue about security and the limitations of the screen or device itself, the fact is we heard exactly the same arguments about internet banking from those resistant to change within the bank. Already many banks are deploying what amounts to a cashless ATM on a mobile application platform – yes, you can do everything on a mobile phone you can do on an ATM except withdraw or deposit cash.

Here are a few statistics that support the second phase disruptive model:

  • 93% of U.S. population owns a mobile phone, and 27% of U.S. households are now mobile only
  • New mobile banking customers at Bank of America (BofA) during July-Sep 09: 150,000 (Sep); 210,000 (Aug); 220,000 (July) (Doug Brown, BofA)
  • 99% of mobile users view balances, 90% view transaction detail, about $10 billion of funds have been moved via mobile transfers/bill pay; 15 million location-based searches being performed (annual run rate)
  • More than 50% of iPhone users have used mobile banking in past 30 days (Javelin Strategy)
  • 33% of mobile banking users monitor accounts daily, 80% weekly (Javelin Strategy)

So if you didn’t need physical cash, what would happen then? This is the third phase― when we move to mobile payments on a broad scale – NFC-based (Near-Field Contactless) mobile wallets and stored value card micropayments are already here, but more is to come. The third phase also involves the convergence of your mobile phone and your credit/debit card, which is a logical technical step in the next five years. When these changes occur, our need for cash will reduce rapidly, then the disruption will be far-reaching…

Now, I can hear the proponents of cash already saying that cash will never die and that such an evolution in customer experience will just add to the complexity. To some extent I agree. However, the key to this is not whether cash will survive, but to what extent it will survive. If the majority of micropayments are all done via an electronic wallet or debit card based on a mobile device (or separate for that matter) and if larger transactions are all done electronically through internet banking or through mobile banking – what’s left?

In the UK 43 per cent of payments are done by Debit Card, and 23 per cent by Credit Card. Cash still makes up 32 per cent of payments, but as a percentage of the whole, it continues to reduce. Cheques make up just over 2 per cent of payments these days, so it is not hard to see these disappear entirely. If the growth of Debit card transactions accelerates further (not hard to imagine if contactless payment capability is built into your mobile) and other mobile payments like person-to-person (P2P) are enabled on your phone, this will further reduce legacy payment methods. It is not unimaginable to see a split of 85 per cent of UK payments done by mobile/card, and 15 per cent by cash in the next five years. In markets such as Japan, Korea, and Hong Kong the requirement for cash may be even less compared with mobile payments.

Changes expected in UK Retail Payments 2006-2015

There are the great unbanked who don’t yet have a bank account who currently rely heavily on cash, but as we will see with M-PESA and G-Money (Chapter 6) this is hardly a hurdle for mobile cash and payments. Success of the Octopus card in Hong Kong, T-Money in Korea and other such locations already proves the concept. We are only talking about the need for ubiquity to make it mainstream. What would quickly kill cash is a technical standard for mobile money that could be widely adopted globally by network operators and device manufacturers.

Even if only 50 per cent of cash transactions are replaced by electronic stored value cards, debit cards and mobile wallets in the next five to ten years, the current ATM and Branch infrastructure that supports cash becomes almost untenable from a cost burden perspective. If you no longer need to go to the ATM to withdraw physical cash or currency, then everything you do on the ATM today can be done on your mobile App phone. If branches no longer need to deal with cash, then a large part of the reason for their existence disappears. HSBC in the United Kingdom has recently announced its intention to stop support cheques, because usage has declined and there is no ongoing business case to support them. The Payments Council Board in the UK has agreed to set a target date of 31st October 2018 to close the central cheque clearing system. If cheques decline to the point where banks can no longer afford to support them and regulators no longer require the banks to provide support for them…

“There will be a critical review in 2016 when the Payments Council will decide whether sufficient change has occurred against agreed published criteria, to press ahead to do away with the cheque in 2018. There are many more efficient ways of making payments than by paper in the 21st century, and the time is ripe for the economy as a whole to reap the benefits of its replacement.[1]
– Paul Smee, Chief Executive of the UK Payments Council

Just like internet and mobile device disruption, this are not the inane ramblings of a technovangelist – this is an inevitable conclusion based on technologies already in place that are on their way to becoming the dominant channel of choice or mechanism of engagement. The behavioural adaption of consumers to the Internet and smart devices already indicates that this will likely take hold within the next three to five years.

Adoption rates are speeding up. Technology innovation is speeding up. Customers are adapting to these new changes quicker and quicker. Banks need to too.

Let’s just say by the time Phase Three hits – if the retail banks have not adapted, they will be clinically dead. Banks can either own the transaction and payment platform, integrate the technology, OR protest with their last dying gasp of breath that things are not really going to change. “The Branch is Back”, “Cash is King”, “Cheques will bounce back” – yeah, ok. You just keep telling yourself that and see how that works out for you.


[1] Source: Payments Council Press Release – www.paymentscouncil.org.uk