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Banking Disrupted: Is a Fear of Failure Preventing Innovation?

“Banking is necessary, but banks are not.” - Bill Gates


Come to think of it, the human civilization did pretty well for thousands of years before banks and insurance companies came around and started playing a major role in our lives. Most people cannot imagine living without insurance and access to banking today, but Banking has been a slow mover in recent times and is getting disrupted. A few years back, ATM machines gave us liberation from bank branches. Then came Internet banking, which made quite a few physical bank branches redundant. Now with mobile payments, the concept of cash is fast facing extinction.

In Kenya, more than 90% people use M-PESA to make payments using their mobile phones. It wasn’t a bank, which conceived the ingenious scheme – it was a telecom company. It is true that mobile payments have struggled to replicate the success in Kenya in other economies, but there has been a disruption in the way we make payments.

Most banks today have invested in a portfolio of smartphone and tablet applications. But research shows that consumers are not as enthusiastic about bank mobile applications as bank marketers might expect them to be.  Research shows that consumers might be feeling an “app fatigue” and do not use more than 5 applications on a regular bases, which is dominated by more personal apps like Facebook, Twitter and Instagram. No wonder then, most Banks still report a higher usage and update of their internet banking from PCs and few have seen an encouraging response to their renewed mobile banking efforts.

A great amount of recent debate is on the concept of digital currencies – currencies designed for a digital world. There is a mature ecosystem of digital payments today in micro segments like in the video gaming and online betting. Currencies like Bitcoins have managed to get attention from Banking regulators dedicated to protecting their turfs. However, banks today are distracted and it is only a matter of time before a globally accepted digital currency goes mainstream. Tight regulations, banking industry norms, fear of innovation, a hands off approach to technology and Banking’s dependence on large outsourced technology partners who proliferate legacy technology  - make the world of online payments an ideal hub for disruptive innovation.

Over the years, it has become clear that traditional banking can reach out to only a section of our society, and for some time now, technology innovation is focused on inclusive banking. One experiment that has gone mainstream is the ‘Peer to Peer’ banking model – formalizing community based lending clubs, which actually go back to times before formal banking came about. US-based Lending Club, a P2P lender that started as one of the first Facebook applications in 2007 and has surpassed $US2 billion ($2.18 billion) in personal loans.

This is how P2P lending works - P2P lenders, who match borrowers and investors through an internet-based platform, offer a compelling win-win. Borrowers, especially those of high credit quality, can receive lower rates than banks offer for a personal loan or credit card, along with a vastly improved customer experience. Investors, meanwhile, make a flexible, short-term commitment and receive a better yield than many fixed-income products by targeting one of the most profitable lines of banking – the provision of personal loans. In May, Google took a stake valuing Lending Club at $US1.55 billion, three times what lenders paid to invest in the platform just over a year ago and plans to go for an IPO in 2014.

In the United Kingdom, P2P lending is also taking off: the market will be worth £1 billion ($1.69 billion) by 2016 if it continues its current pace of growth, according to Bank of England-supported research by the Open Data Institute, released in July. The market itself has trebled in size in the past three years; between October 2010 and May 2013, almost 49,000 investors funded loans worth more than £378 million. Prime Minister David Cameron, whose Conservative government has been investing alongside them to boost credit, is now supporting Peer-to-Peer lending.

We won’t talk here in detail about what the banks are doing on social platforms like Facebook and Twitter. For most banks, spend on TV based marketing has replaced spend on social media – they use it to talk, and refuse to listen. Cyberspace is full of dedicated platforms created by disgruntled customers who share their stories online. They rate products, experiences, and discuss instances where service commitments were missed.

There are some banks however, that are are breaking the mold here. For example, Deniz Bank in Turkey uses Facebook to offer a crowd saving product. So, rather than raising funds for an office birthday or leaving do the old way – someone goes round the office with a begging bowl and comes back with $29.25 if you’re lucky – the new way is to show smart 'crowd saving'.  So you set a goal – we want to get a colleague a $50 bouquet of flowers for her birthday – and send that round the office using Facebook and Denize Bank’s smart crowd saving app. The money is far more rapidly and socially gathered!

Another Turkish Bank, has used gamification to reach out to SMEs and educate them about different banking products, Sosyal Kobi (Social Business), that has garnered over 50,000 active players and 200,000 subscribers. Banks in Turkey have made an effort to identify their demographic – which is mostly young urban professionals and have designed their technology investment accordingly. But they are more an exception than the norm.

In most cases, even bank marketers know what troubles their customers - and yet put their technology efforts and focus elsewhere, usually in more gimmicky social media campaigns - perhaps as a result of internal pressures from upper management within the banks themselves. If banks can use technology to bridge this expectation gap with consumers, it could be a win-win situation for everyone. The survey revealed interesting bits about what customers didn’t like about their bank were:

  • Hidden fees or unexplained costs
  • Billing errors
  • High fees and additional service charges for in-person service

What customers who changed banks said they wanted were:

  • Lower rates
  • More options and services
  • No surcharges or fees
  • Convenience of branch location

While Banks often look to FMCG sector to hire top marketing talent and shape their marketing strategy and spend – unlike some leading FMCG brands, fewer banks have used recommendations from customers to improve services or offer new customer touch points, products and services.

Most Banks have a fear of experimentation and an even more morbid fear of the t-word demon - “transparency” which technology threatens to bring. No wonder that it took a travel startup to disrupt the personal finance industry – by offering visualization and analytical tools for people to integrating their mortgage, bank accounts, credit card and offline investments. People are happy to pay for these services, and often refuse to use similar services offered for free by their banks. I wonder whether any bank marketer loses sleep over this?

It is not surprising here that a global survey studying digital marketing adoption in Banks revealed a sense of frustration with lower than expected returns on efforts, resources and investment on social media.

Banks also ignore the fact that Customers, by nature are social and will consider peer reviews before deciding on a financial product. It is not very surprising then that even today, very few bank websites support honest customer reviews, let alone bank comparison services. Bank marketers seem to be working on a hypothesis that opacity is good for business. This hypothesis is being challenged by bank alternatives in the digital world today.

While banks have always been touchy about the security of online transactions, recent developments, like the revelations about NSA and PRISM monitoring and increased instances of data leaks from governments and enterprises have made both retail and enterprise customers uneasy. As smartphones become more ubiquitous and more customers get used to banking online, the demand from banks and financial institutions for improved and enhanced security and privacy management will only rise. Banks and financial institutions cannot afford a hands-off approach to digital security, which can to be trusted to external consultants or commercially available off the shelf tools which hackers are training their guns for.

The challenge now is for banks to deliver the efficient, value-added service options, and reduced costs, in a secure way. If banks refuse to give customers what they want, they could end up being disrupted by innovations happening the finance space.

While Banks and Financial Services players lead the world in terms of technology adoption, they often do so without keeping the customers in context. With the advent of social web and mobile media, a fundamental shift is happening in the world of Finance.

Banks need to acknowledge the disruptions in financial technology sector, learn from them and start experimenting with technology, without the fear of failure. Future will belong to Technology-driven Financial Institutions and not just financial houses with an IT department.













Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.

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