Millennials are no longer turning to their banks for advice. In fact, over 70% of Millennials would rather go see their dentist than listen to what banks have to say. Since the financial meltdown of 2008 the perception of banks has been significantly marred. Trust has been eroded and loyalty ruined. Adding fuel to the fire, today’s digital revolution is poised to impact the financial services industry in a way that hasn’t been seen since the ATM was introduced in the 1970s. Technological progress is affecting every sector of the industry including asset management in the shape of robo-advisors. These robo-advisors are growing at unprecedented rates by meeting Millennials’ jobs to be done – an important segment to attract as Millennials are now the largest generation in the US and are about to command the largest share of wallet in the US with an estimated $7 trillion in liquid assets by 2020.
Much of this week’s tech excitement has been around the size, shape, and display of the new iPhone 6. Perhaps the most important long-term implications, however, will come from Apple Pay, Apple’s new play in mobile payments. Apple Pay – enabled by Near Field Communication (NFC) – is hardly a noteworthy technology innovation. Despite limitations in point-of-sale (POS) infrastructure and relatively slow roll-out in the corresponding phone technology, Google Wallet and others long ago made mobile proximity payments a mass possibility. NFC has been around for roughly a decade. At the same time, companies such as Square have been steadily popularizing mobile payment solutions for both consumers and smaller merchants.
So, why is Apple Pay significant? Much like with Apple’s past successes, the relevant technology is now being integrated into a larger business model innovation. Somewhat serendipitously, this business innovation nicely coincides with shifting consumer behaviors and demands for retailers to upgrade POS terminals. In particular, Apple Pay benefits from five key advantages that might allow Apple to be the driving force in fueling the growth of the US mobile payments market.
With Congressional negotiators reaching agreement early this morning on key provisions of the U.S. financial overhaul, it is a good time to weigh the impact of the bill on innovation in this sector. Many commentators have predicted that the impact of the financial overhaul on innovation might be dire. Others have indicated that reducing innovation might actually be a good thing, given that innovative financial services played a key role in the economic crisis of 2008. Both of these assessments seem to miss the mark.
The 2000-page bill is extremely complex, and a blog post cannot do justice to all the intricacies. At a high level, the bill will curb banks' ability to profit from proprietary trading, creating complexderivatives, pushing consumers into costly products, or charging hefty fees to merchants accepting debit cards. Banks, particularly big banks, will earn far lower profits in these areas, which represent key financial services innovations from the past two decades.
But what about the financial overhaul innovation impact going forward? While it was relatively easy for banks to make money (prior to 2008) by innovating in established product lines, such as through creating seemingly infinite varieties of mortgages, there have been few new product lines emerging from large banks, nor have these institutions paid much attention to the 7.7% of unbanked or 18% of underbanked U.S. households. Instead, some of the more creative approaches have come from non-bank institutions ranging from economic development groups to hedge funds. Witness for instance the alternative to payday lending created by Kentucky's Mountain Association for Community Economic Development, which embeds a savings product into a relatively inexpensive short-term loan.
In a speech today at a major innovation conference, Dartmouth Professor Vijay Govindarajan talked at length about how Grameen Bank turned upside down all the traditional notions of financial services in Bangladesh: small loans, no risk officers, no collateral, bringing the bank to the village, and so on. The Grameen model earned its Founder the Nobel Peace Prize, in addition to creating a very large and sustainable enterprise. The lesson can applied broadly in financial services innovation, as well as to other industries.
In a famed episode of the TV series Seinfeld, the cast encounters a set of four friends who look just like them, but behave in a totally opposite manner. Feldman, for instance, lives across the hall from his best friend, but always knocks before entering, brings groceries, and has well thought-out schemes. This new crew becomes known as the Bizarros.
It can be very useful to think through what the Bizarro version of a company might be. The exercise can lead firms to consider how they might violate long-held rules of an industry in a compelling way. Companies find the exercise especially fruitful when they focus their analysis on a customer set that is poorly served by traditional models today.
Grameen turned the banking model upside down with respect to poor villagers. Another firm, AllLife, has done the same for sufferers of HIV and diabetes in South Africa. AllLife, which is an unabashedly for-profit enterprise, targets these large groups of people that are highly motivated to buy life and disability insurance but viewed as unacceptable risks through typical financial services lenses. The company pursues customers that other insurers shun (violating the maxim that insurance is sold, not bought). It requires its customers to regularly submit medical information showing compliance with therapies for these diseases. It regularly interacts with customers to remind them to adhere to their treatment protocols.
Citigroup has quietly declared defeat. In 2008, it became the first major American bank to experiment with mobile payments – using cellphones to buy products and transfer money. But the envisaged uses of this service, called Obopay, did not materialize. The technology is trivial, but consumers saw little need to pay their restaurant bills by cellphone, replacing cards and cash which are familiar, reliable, and easy.
What can we learn from this failure?
Citi seems to have embraced mobile payments like a bank, trying to force-fit an intriguing technology into existing applications. Organizations often err this way – look, for instance, at large solar energy projects being subsidized to generate power for the electrical grid, rather than in off-grid, small-scale applications. People initially viewed the telephone as competition for messenger boys. The examples are endless.
What the bank found was that people used Obopay to meet other, unmet needs. Up to half of users were parents providing a weekly allowance to their children. Another big source of usage came from small business owners who did not accept electronic payments but wanted to replace cash. These were surprises.
Whenever a trend seems inexorable, it’s valuable to look carefully at the whitespace being left behind.
In the case of retail banking in the United States, the ranks of small community-oriented banks have shrunk relentlessly. From over 8,000 banks with under $100 million in assets in 1992, the number of these banks has sunk to under 3,000 today. The biggest banks have benefitted, with the top country’s top 6 banks now having assets equal to over 60% of GDP, compared to 20% two decades ago. Community banks have seemed sub-scale and outmoded, unable to compete with these behemoths.
Yet these banks occupy a potentially powerful market niche. Many customers have little interest in the many varieties of checking account a national bank might be able to offer. They grudgingly trust others with their money, and just want simple services from a bank run by local decision-makers. They want to interact with real people, not faceless call centers, and they are loyal to their communities. As one customer of a local credit union recently told National Public Radio, “You feel like you’re talking to people in your community. You don’t feel like you’re talking to someone who’s sort of filtered through some corporate monstrosity that really does not have your best interest in mind.”
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