While I was at SXSW last month I attended a panel (yes I know attending panels at SXSW is rare!)entitles Financial Services & Technology Rockstar Women. The panel promised to allow attendees to “Hear from global financial services and technology leaders, who happen to be women, how they use social media to drive innovation and change in this highly regulated industry.”
The panellists, all involved in social media outreach for financial institutions, discussed how “using social media to drive innovation and change – despite the heavy regulations around the financial services industry – can be inspiring to any organization or industry that is faced with the challenges of working with other departments.”
I’ve spent a long time thinking about and talking to folks about what Banking 2.0 should actually look like and so it was serendipitous to happen upon this panel. Despite some some very smart people talking, I was left feeling a little flat post panel – and much of this can be attributed to the fact that i strongly feel that simply putting a social layer on an archaic system, while an admittedly good way of building engagement, is simply lipstick on a pig. As I tweeted during the panel, social media for the financial services industry is Banking 1.1 at best, I’m still waiting for Banking 2.0.
So why does it matter, and why are banks needing to think about this stuff very seriously? Well a recent post over on The Register brought up some very interesting statistics. Apparently 50% of Apple product users would bank with Apple, where they to introduce financial services. This is the organization that already has people’s payment details, an extensive history of their buying and spending patterns, connections to consumers through services and devices they chose to use (rather than ones they’re forced to use because of legacy reasons).
I spent some time recently talking with some people that provide services for banking institutions to deliver their core services via mobile. I talk to people doing social media outreach for banks. I speak with teams trying to redesign internet banking to look a little more bling. All of these are examples of what I see as lipstick on a pig – not changing the very core of the banking offering.
So why do financial institutions have the ability to essentially tinker around the edges rather than rebuilding from the core? Well for the longest time the financial sector has been a heavily regulated industry with massive artificial barriers to entry – Governments, central banks, regulatory authorities and the like all put barriers in place to competition. But I don’t see those barriers remaining in place for too much longer. As I said in a fit of exasperation recently, banks are fundamentally working on a flawed model, it’s only regulation that keeps them afloat.
So who will walk into this void? Three organizations that have varying levels of strength in the following;
- Monetization models that are based primarily on the acquisition and analysis of personal data
- Strong level of adoption across device types, media channels and content classes
- The network effect of a huge userbase and the inter-connectedness of those users
- An existing financial relationship between the vendor and end users
- A strong converged presence across different devices
- IP and/or an understanding of broad horizontal disruption
If I were a bank, or a decision make within a bank,I’d be looking over my shoulder at both Google and Apple as the strongest candidates to reinvent banking. Google because it can do so without direct monetization being the primary driver and Apple because they have been so successful at disrupting traditional industries to date.
Banks will continue to reinvent the way they communicate with customers, and this is of itself a good thing. But in the mean time they are staring down the barrel of some challeneges that make external communications look like an absolute walk in the park – carnage is going to ensue.
(Cross-posted @ The Diversity Blog – SaaS, Cloud & Business Strategy)
Some other points to consider.
First, Apple will never become a bank. Ever. It’s one thing to talk about processing payments. It’s another thing entirely to talk about taking deposits, issuing credit cards, making loans, offering investment services, etc. Just because an organization can facilitate payments does not make it a bank, nor does it mean the organization intends to become a bank. The same things could be said of Facebook.
That 50% of the world says they’d bank with Apple is interesting, but inconsequential. 50% of the world would buy ANYTHING from Apple — tires, lipstick, concert tickets, etc. That doesn’t mean Apple has any interest/plans to enter these markets. Apple sticks to industries that people like, want and enjoy… not icky commodities people despise because they are life requirements (e.g., banking).
To answer your question about why so few financial institutions “innovate at the core”… There are about 14,000 retail financial institutions in the US. Those who have even the ability to “innovate at the core” number less than 250. Why? Because only the über big banks run their own core data processing systems. The other 13,750 banks and credit unions have to buy their core DP systems from third-party suppliers. The core infrastructure required to run a bank is so large and complex, it is waayyyyy beyond what a financial institution can afford to build.
Even the vendors who make the DP systems struggle to keep up with their own software. It usually takes them 2-3 years to roll out a new platform.