Tag Archives: business models

Online Pillar 2: #Finance

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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

Online Pillar 1: #Health

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When my iPhone upgraded to iOS8, and up popped a new screen icon called “Health”, was there any further proof needed of the importance of this market to Apple’s app store?

Last week, I launched a series of blogs on the Three Pillars of the Online Economy. This week, I take a look at the Health sector.

There are 10,000’s of health and fitness apps available – digital magazines, monitoring apps, relaxation tools, brain games, diet planners, exercise diaries….

It’s probably the fastest growing category for apps (outside games and social media), so no wonder Apple sees value in integration, as well as making it easier for developers to bring new apps to market.

The health sector is a natural leader in innovation – from pharmaceutical research, to e-health management. But the health industry is not so vertically integrated that it is invulnerable to market disruption – neither in its supply chain, nor in its traditional business models.

For a start, despite our lifelong need for health services, as consumers we do not rely on a single provider. We may have continuous or recurring relationships with a specific doctor, clinic, hospital or health insurer – but by and large, barriers to switching are low, and in fact we often need to change our providers at various stages of our lives.

The discontinuity of our health provider relationships, and the fragmented service delivery are key reasons for the development of digital health record management systems. Notwithstanding privacy issues, the ability to consolidate our individual health records in a single online profile makes enormous sense:

  • continuity of patient information
  • remote and/or shared access to individual records
  • trend analysis across aggregated data
  • strategic planning for service design and delivery
  • public health monitoring and awareness

An area where the health sector is potentially vulnerable is circumvention of the stringent regulations that normally create a barrier to market entry. None of the health and fitness apps I have seen in the iTunes Store carry any sort of health warning or regulatory notice, and most of them have a 4+ rating. OK, so these apps don’t actually administer drugs or direct treatment, but pharmaceuticals and other therapeutic goods usually face significant regulatory hurdles before they can be released to the general public. So, maybe regulators need to take a look at this issue to ensure consumers are better informed before they cause themselves harm.

The increase in wearable devices linked to smart phones and mobile networks offers huge benefits for the medical industry – from web-based diagnostic tools to remote-controlled administration of treatment; from early warning monitors for stroke victims, to better delivery of pharmaceutical information to patients. As we know, prevention is better than cure, and I wouldn’t be surprised if health insurers start to offer discounts to older customers who use a wearable device linked to a monitoring service for things like heart rate, body temperature, glucose levels or dehydration. While some people may balk at this “Big Brother” intervention (well, Nanny State interference), the benefits would undoubtedly accrue to everyone via cheaper medical insurance, more targeted health resources and streamlined service delivery.

In recent months I have come across numerous local startups in Melbourne within the health sector – from improved co-ordination of patient information between hospital staff, to matching carer skills to customer needs; from an epilepsy monitoring tool to remote-controlled prosthetics. This just proves the point that innovation in the industry is both leveraging off and contributing to developments in the wider online economy.

Next week: Online Pillar 2: #Finance

The “Three Pillars” Driving the #Online Economy

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Games and social media apps may currently be generating the most downloads and revenue, but the real innovation in the online economy comes from the “Three Pillars”: Health, Finance and Education.

What these pillars have in common are:

  • clearly defined market verticals
  • well-established business models
  • life-long customer engagement
  • highly regulated operating environments

They are also industries that are continuously innovating, which makes them interesting bellwethers for what might emerge in other sectors of the economy.

However, they do not display closely integrated vertical markets, and despite the regulatory barriers to entry they are vulnerable to disruptive technologies and new business models.

I’m reminded of the proverb “early to bed, early to rise, makes a man healthy, wealthy and wise” – such that we cannot afford to ignore what is going on in these industries, and nor can we fail to understand the implications for each of them based on what is going on elsewhere.

From mobile payment systems to wearable fitness devices, from Apple’s new “Health” app to mass open online courses, from peer-to-peer lending to shared health alerts, these sectors are responsible for (and responding to) significant changes in the online economy, and over the next few weeks I’ll be offering some personal observations on the trends, threats, lessons and observations for each of the three pillars.

I encourage readers to contribute to the debate via this blog….

Next week: Online Pillar 1: #Health

Joining Australia Post’s “National Conversation”

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In a previous blog, I offered some thoughts on the possible digital future for AusPost. In response, I have been contacted by one of their social media consultants, drawing my attention to the “National Conversation“.

First, I acknowledge that AusPost is attempting to have an “open” conversation with customers, but I don’t see how this is really helping, other than generating a range of (conflicting) opinions, with little cohesion around the key issues. Participation rates in the Topics to date has been very erratic (in terms of numbers, and geographic distribution).

Second, I have read CEO Ahmed Fahour’s latest address, and frankly it did not inspire me. Basically, it was a whinge about the decline in letter volume, and the “challenges” of the Internet (which, as he says, has been with us for 25 years…. hardly a new event!) I also think there are some factual inaccuracies in Mr Fahour’s assumptions: I don’t believe that Australians are any less digital citizens than their OECD counterparts – they have always been reasonably early adopters of new technology (as evidenced by the number of smart phones and tablets). Where they have been slow is in moving to online services, but this is in large part due to poor Internet services (notoriously slow connection speeds and restricted bandwidth, and exorbitant access fees), coupled with a paucity of reliable online platforms – which is ironic given the push towards eGovernment, eCommerce and the digital economy around 1999-2001.

Third, and staying on the topic of eCommerce, the one recurring theme that does emerge from the National Conversation so far is the high cost of sending small parcels. I agree with some of the feedback that it is often cheaper (and quicker!) to order consumer items from overseas online retailers. Shouldn’t Australian consumers expect to benefit from the economies of scale to be achieved from a growing parcel business?

Finally, my previous blog suggested that digital transactions are the future for AusPost (while acknowledging the need to maintain its statutory obligations for letter delivery) – but apart from e-mail and bill payments, Mr Fahour’s address was rather silent on this point. That scares me, as it suggests a lack of vision for an integrated digital strategy. After almost 5 years in the job, you’d think a few more ideas would have emerged by now.

(Afterthought: maybe AusPost should check out what Shomi is doing – a local start-up with some smarts in linking the physical and digital worlds.)