Brett King

Posts Tagged ‘start-ups’

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!


SXSW: Where’s the Bank Innovation coming from?

In Bank Innovation, Customer Experience, Future of Banking, Strategy, Technology Innovation on March 13, 2011 at 02:12

South-by-Southwest’s Interactive sessions in Austin, TX are a major creative and customer-focused experience. The amount of networking that is taking place, the amount of active innovation and discussion on taking it to the next level is awesome and mind blowing. There’s only one thing…

If there was a game on at SXSW to find 20 bankers – It is highly doubtful that anyone could win that one.

There’s innovation discussions occurring around mobile, gaming, social media, user experience, geo location, but it appears SXSW only has 4 sessions that are connected with banking, which is indicative of the level of engagement. There are payments and retail engagement discussions, there are gaming and social discussions, there are startup and venture discussions, health and work discussions, but not so many on banking.

In our session today where we attempted to discuss innovation in the banking arena, we had spirited discussion around who are the innovators, but the reality is we didn’t get into really sexy innovations. We didn’t get into how mobile payments would change the world, the emergence of new digital currencies, virtual banking models that cross borders, distributed and pervasive banking content embedded into the retail experience, Infographics style PFMs transforming customer engagement, new banking models leveraging off the likes of P2P, social or community enablement, reinventing the credit score or improving financial inclusion through cheaper smartphone platforms. The reason we didn’t get into any of the really sexy stuff is that the problems of innovating the banking sector are much more fundamental today.

Some of the Twitter feedback based on the #BankInnovation hashtag from the session “Banks: Innovate or Die!” indicated frustration at not diving into more deeper matters of innovation.

One blog response from Oscar Llarena (aka @softwaremono) asked the question “Does Customer Service = Innovation?“. In many ways, this very question and the amount of time that was spent talking about customer behavior and the ability of banks to match customer expectations is very telling when it comes to what innovation is needed in the banking arena.

Organizational Inertia
One of the key issues and the reason expectations are low in the financial services space is that most banks don’t even classify these things as innovation. When you ask a die-hard banker about innovation you are more likely to hear about Collateralized Debt Obligations, Derivatives, Barbwire Hedge Contracts or Swaptions than technology integration or customer experience improvement. This is because fundamentally banking has really never had to rapidly innovate the basic model of engagement of customers; branches, cheques (checks), credit cards and other such mechanisms are innovations that occurred over the space of decades or centuries.

The other issue is that risk aversion, philosophical marriage to traditional distribution models and embedded metrics around products sold through branches, mean that organizationally the bank has to first start thinking about changing the way the performance of the business is measured, and structured, before serious innovation can take place. This will take time.

In the meantime the easiest way to create innovation (that goes against the grain of long-embedded business practices and performance structures) is to simply circumvent the traditional bank organization. It could be argued this is why UBank, Jibun Bank, First Direct and ING Direct have been so successful at doing banking better – because they didn’t have to solve the organizational problem first. However, when we see more fundamental business model innovations like P2P lending and new payments systems like M-PESA, these have circumvented banks all together.

Banks will eventually get their act into gear and either replicate alot of this stuff, or acquire it to get the innovations, but such an approach would be like Blockbuster putting up a website that looks like NetFlix. Unless you fundamentally redress the organizational reliance on a very traditional business model and structure, then it’s never quite going to work.

Why innovation has to start with the customer…
In retail banking or financial services, one of the reasons we get so hung up on just some simple elements around customer service, the user interface between the bank and the customer, transparency and the way a bank assesses the risk of an individual consumer is simply that these are the areas that are now so glaringly obvious that they need a more rapid solution. Why? Because they are the very areas where the gap between customer behavior and expectations is growing rapidly with the delivery capability of the average retail bank. Before you can really start with breakout innovation you need to be able to meet customer needs.

Can you do that if you are trying to convince customers to buy irrelevant products because they are higher margin, or if you are trying to force customers into a branch because you’ve got a substantial investment in real estate? No.

So is customer service innovative? Transforming the customer experience and engaging customers in new ways, is a massive leap forward in banking – it may not be sexy innovation, but it is transformational for a sector who thinks they make profits despite their customers.

Why SXSW still matters for banks
In this environment, there are massive opportunities for entrepreneurs and innovators to create bridges between the customer and the institution. This will be through start-ups, new apps or UIs, new user experience models, gaming, and all the sexy stuff that SXSW at large is discussing. But it likely won’t be through traditional banks (sorry @annaobrien). Why?

Probably because you will never see a traditional banker at SXSW because they don’t get the imperative for customer innovation. They send along the geeks, who they expect to build the apps and to maintain the social media presence, but those resources won’t be sitting in the boardrooms talking about new organizational structures, different performance metrics and how to transform the business wholesale.

In the end, the success of start-ups and innovators like SmartyPig, LendingClub, BankSimple and MovenBank will be initiatives that banks feel compelled to follow because customers feel affinity with these new brands. But don’t expect them to rush into it…

In the end customers will win and I guess that is all that matters.

Retail Banking Innovation Infographic

Is product innovation enough?