Online Pillar 2: #Finance

Along with the launch of the iPhone 6, Apple also announced a new mobile payments system. OK, so it’s not the first smart phone app that will help you manage (read: SPEND) your money, but it’s likely to be a market leader very quickly. After all, financial services mean big money in the interconnected online economy.

This week’s blog is #2 in my mini-series on the Three Pillars. Away from NFC solutions, digital wallets and virtual currencies, what else is helping to drive online innovation in financial services?

First, as with last week’s look at Health, it’s important to consider that despite being both a defined business vertical, and a highly regulated industry, the financial services sector is also vulnerable to market disintermediation, horizontal challengers and disruptive technologies.

Although most of us tend to stick with a single financial institution for the bulk of our banking products and services, we will likely use different providers across our credit cards, insurance policies, personal investments, retirement plans and foreign currency. The major banks don’t always do a good job of being a single provider of choice because they tend to manage their customers from a product perspective, and not always from the vantage point of a life-cycle of different needs.

Most retail banks have launched customer apps – mainly for account management and transaction purposes – and likewise, other platforms such as PayPal offer smart phone solutions. As with our other two pillars (Health and Education), Finance apps proliferate – e.g., calculators, account aggregators, budgeting tools and branded customer products from major financial institutions. But unlike Health apps, at least the Australian retail banks have to comply with consumer information requirements – although I suspect this is more a requirement of APRA than Apple. (Question: should apps offering stock market data, or enabling customers to plan investment strategies have to include product disclosure statements, or ensure customers have first completed a mandatory risk profile?)

Disruption in the banking and finance sector is coming from a variety of directions:

  • traditional retailers extending their existing credit card and insurance services into deposit accounts and investment products;
  • technology startups creating online payment systems;
  • trading platform Alibaba offering microfinance, trade finance services, deposit accounts and investment funds; and
  • online retailers and market places collecting a lot of useful behavioural data on customer creditworthiness and implied financial risk – for example, platforms like eBay and PayPal are using transactional data to assign customers a quasi-credit rating score or ranking.

Elsewhere, the financial services sector drives the use of data and technology to streamline stock trading and settlement – across algorithmic trading strategies, low-latency trading, straight-through securities processing, transaction and security data matching, market identifiers and real-time data analytics. The use of social media sentiment and stock #hashtags is also creating new trading strategies among savvier investors – one major Australian bank I spoke to recently boasted of having a Media Control Centre, where they can monitor client engagement, customer activity and brand profiles across the social web.

Crowdsourcing services, along with other platforms for raising capital and early-stage funding (plus new online listing and share trading platforms) threaten to disintermediate established stock exchanges, investment banks and stock brokers. Yet I see a huge opportunity for traditional bank and non-bank lenders to use these techniques for themselves. For example, banks love asset-backed and secured lending, as opposed to overdraft or cashflow lending. However, most startups don’t have physical assets such as plant or machinery, and young entrepreneurs are less likely to own property that can be put up as collateral.

So, what if banks see startup clients as a new channel to market? By investing part of their marketing costs or R&D budgets to underwrite new business ventures, they could help fund early stage ideas, and gather valuable information on customers and suppliers. Some banks are sort of moving in this startup direction – NAB and RBS, for example – but they have yet to demonstrate new business models or innovative product solutions that align with the lean startup and new entrepreneurial generation. I have observed many founders bemoan the lack of support from banks when it comes to offering merchant services that align with the needs of startups.

On another level, banks could do more to connect ideas with capital, customers with vendors, and buyers with suppliers – as the increasingly online and highly networked economy introduces new supply chains and innovative business models. (Hint to my bank manager: referrals and recommendations are often the most cost-effective way to acquire new customers – so, maybe we can help each other?)

Of course, where financial institutions really need to lift their game is in coming to grips with the shared economy. If consumers no longer see the need to buy or own assets outright (thereby reducing the reliance on mortgages, personal loans, hire purchase agreements and even credit cards….) what are the implications for financial services? Maybe banks need to take more interest in these “shared” asset eco-systems. For example, if I have taken out an investment loan to buy an apartment, which I plan to list on Airbnb, wouldn’t it be in the bank’s best interest to make sure I am getting as many bookings as possible – by helping to market my property to their other customers, or by making it really easy for people to book and pay for the accommodation via their smart phone banking app, or by enabling me to run online credit checks on prospective customers?

It’s nearly ten years since the term “distributed economy” was coined to encapsulate the new approaches to innovation, collaboration and sustainable resource allocation. Apart from microfinance and some developments in CSR and ethical investing, I’m not sure that financial institutions really grasped the opportunities presented by the distributed economy – sure, they were quick to outsource and offshore back office operations, but this was largely a cost-cutting exercise. Innovation in financial products mainly resulted in complex (and risky) derivative instruments – and ultimately, led to the GFC.

In the current low/slow/no growth economic climate, banks have to look at new ways of generating a return on their capital. They can’t just keep paying out higher shareholder dividends (not when banking regulations require them to increase their risk-weighted capital allocation); so they must engage with the new business models and the people behind them, and they must be willing to do so with a new mindset, not one built on staid financing models. Sure, they need to maintain prudent lending standards, and undertake relevant due diligence, but not at the risk of stifling innovation in the markets where their customers increasingly operate.

(For a related article on this topic, see here. Since I drafted this blog, PayPal has launched an SME loan platform, and it has just been announced that the ex-CEO of bond fund PIMCO has taken a key equity stake in an online Peer-to-Peer lending platform.)

Next week: Online Pillar 3: #Education

4 thoughts on “Online Pillar 2: #Finance

  1. A really good post.
    I remain amazed at the way the “big 5” banks have remained wedded to their physical asset backed business model, effectively evacuating the space that continues to evolve using all sorts of technology as distribution channels for that most commoditised of all commodities, money.

  2. Pingback: The future of #FinTech is in Enterprise Solutions | Content in Context

  3. Pingback: The future of #FinTech is in Enterprise Solutions | Content in Context | FinTech Melbourne

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s