The recent announcement by Apple of its collaboration with banks to launch Apple Pay is a perfect example of the partnerships that author Dan Schatt—formerly of PayPal, himself—recommends in Virtual Banking.
Technology is changing so rapidly, banks can’t keep up with the pace of development and innovation on their own. Schatt’s contention is that traditional banks need to stop looking at these new non-regulated startups as their competition in the payments and lending space.
Schatt, once head of financial innovations for PayPal, is now chief commercial officer for Stockpile, which sells gift cards of fractional shares of stock. Schatt insists that it is time to figure out how to join forces with these innovators in ways that will benefit both organizations.
The challenge for banks of all sizes is to determine where technology is headed and with whom they need to partner to obtain the best results.
“Mobile-first mindset”: You can’t not keep up
As president of a community bank, I must admit I am lost among all of the new ideas that are available, and, honestly, most of the technology is over my head. Perhaps you share my bewilderment at times.
So I found this book an excellent resource to help guide one in understanding new technology and how it can benefit your bank. It is a must-read for bankers wanting to innovate.
Consider these figures from Schatt’s book: Two years ago ING DIRECT in Canada didn’t have a mobile phone application. Today 18% of its banking transactions happen on mobile phones and 51% of the consumer’s internet time is via connecting through a smartphone or tablet.
With the rapid acceptance of mobile devices that these numbers reveal, financial institutions need to have a “mobile first” mind-set. The author believes the single most important driver in mobile banking is the emergence of the digital or cloud-based wallet, such as Apple’s.
These wallets create a “token” in place of the card. By creating a token, your sensitive information is replaced with symbols that retain the information without compromising security.
Mitek, a leading provider of mobile services to financial institutions, has developed an application for mobile photo bill pay. This goes beyond remote capture of checks. Mitek’s service allows the customer to take a picture of a billing coupon and pay it from their bank account. Mitek has indicated customers in the 25-to-34 age range are three times more likely to use this product.
It’s not just about the payments
One fact to keep in mind when developing mobile payment applications is consumers expect additional value other than the payment itself—otherwise, they would just use a card. Financial institutions need to be thinking more about the value created around the payment, rather than the payment itself, and that requires thinking differently about design, products, and partnering. The most innovative banks will make it easy for consumers to use mobile devices in whatever a situation requires.
It has always been a top priority of banks to keep their customers’ account information safe and secure. Now bankers need to have a mind shift—from only protecting the customers’ information to continuing to protect it, while at the same time using the data contained in the account to help the customer manage their money.
Customers want banks to offer products like PFM (personal financial management). These products track the individual’s spending based upon the information contained in their bank account.
As an example, the customer sets up spending limits and savings goals. If they spend too much in one category, they will receive a spending alert. When the customer achieves their savings goal, their bank rewards them and sends them a reward alert.
Brett King, CEO of Moven and best-selling author of Bank 3.0 and Breaking Banks, believes banking is becoming more of a utility rather than a place you go. In an interview in Schatt’s book, King discusses how Moven has leveraged social media to benefit the bank and the customer. (To read Jane Haskin’s review of King’s books, see the links at the end of this review.)
“When a customer opens the Moven application, they see their account balances, but the home page is also dedicated to what is happening with their money,” says King. “It doesn’t contain a list of products Moven is trying to sell the customer.”
King also discusses how Moven uses social media to interface with its customers, and why: “40% of customers use Facebook Connect to sign into their bank account because they can use Facebook peer-to-peer payments to send money to their friends by simply choosing a Facebook friend. The friend receives a message in their Facebook inbox that asks if they would like to accept it. Once the receiver clicks on it, they are pulled into the Moven environment. The receiver is then asked if they would like to keep the money in a Moven account or ACH it to an existing bank.”
Many of the recipients of payments from Facebook friends will sign up for a new account because of the ease of using the technology.
Peer-to-peer-to … bank?
Bankers need to be aware of the rapid growth in peer-to-peer lending. U.S. peer-to-peer lending company, Lending Club, has over $2 billion in loans and they are beginning to explore partnering with banks to provide personal loans for the bank’s customers.
Peer-to-peer lending companies operate on efficiencies that are 400 basis points lower than the traditional servicing costs carried by financial institutions. Borrowers and lenders connect on the internet where interactions take on a more personal approach. Individual lenders may look for non-profit borrowers with a cause they believe in or other borrowers may have a new product they are trying to develop and are seeking funds.
Whatever the need, this is a rapidly growing industry. Banks and peer-to-peer lenders could partner to help bank customers obtain loans. An example would be a commercial real estate loan where the borrower didn’t have enough of a down payment to meet the bank’s underwriting requirements. The peer lending group could loan the customer 20% and the bank make a loan for 80%. Another possibility would be for banks to make loans over a peer-to-peer network. (For a crowdfunding alternative to this, see “UNconventional Wisdom: Please crowd me”)
All of these are opportunities for the traditional bank to partner with a peer-to-peer lender.
Secret to mobile: location, location, location
Retail shopping has undergone significant changes due to technology. Most consumers today have already researched big-ticket purchases on-line before they go into the store. In fact, they may be “showrooming”—only going to the store to look at the product in person before they purchase it online.
But for every trend today, there may be a counter-trend. In a recent survey by Accenture, 72% of consumers admit to showrooming, but 78% of consumers also indicated they had participated in “webrooming”—browsing on the internet and then purchasing the product in the store.
Banks can use location-based technologies on a customer’s smartphone to tell where they are located. If they are in an electronics store, the banking platform could send them discount coupons to use in the store. If the customer is at a car dealership, the bank’s software could generate an offer for a car loan based upon the customer’s history at the bank.
These are just illustrations of Schatt’s point that banks are going to have to start giving customers personalized delivery of products when they need it and where they need it to stay relevant.
Once again, the bank has all of the information on how much customers spend and how much money they deposit into their accounts each month. This is information that can be used to customize products for the customer.
Will Apple seed major bank movement?
The announcement of Apple’s digital wallet should provide the tipping point to speed up the use of digital wallets by the consumer. Following Schatt’s thesis in Virtual Banking, it is important for banks to partner with the Apples and the Googles of the world to make sure their card is “top of the wallet” if possible, and, if not, at the top at least in the wallet.
However, one of the obstacles the wallets will have to overcome is whether in the eyes of the consumer the digital version is superior to carrying the leather variety. There are many items suggested for inclusion in the digital wallet. Among them:
• Personal financial management tools that alert you in real time as you are shopping as to the status of your monthly budget and account balances will provide an important connection.
• Coupons that are linked to your credit or debit card offering rebates back to the card in a few days provide extra incentives.
• “Prepaid cards” loaded into a wallet allow you to know the account balance at all times.
• Tickets and boarding passes could be loaded for ease of use when traveling.
The point is that when seeking a partner for a digital wallet, banks need to look at companies that provide a strong consumer value proposition—something that goes significantly beyond just facilitating a payment in a new way.
Resources and a kickstarting message
Schatt provides one of the best explanations I have ever read of math-based or digital currencies such as Bitcoin. He even suggests there might be opportunities for banks to act as escrow agents to hold Bitcoin until larger transactions settle. Right now I don’t see that happening, but it is a novel idea.
There are many charts in this book that give you the names of specific solutions for various products a bank might be interested in pursuing.
One message came through loud and clear in this book. If you don’t innovate and partner with new technologies, you won’t be able to compete in the “virtual banking world.”
- Look Before You Leap: Key Considerations for Moving to a Digital-Only Model
- Disruptions Past, Present and Future Raise the Existential Question: “What Are Banks For?”
- Study Links Credit Card Offer to Bank Choice
- What Banks Can Learn From the United Capital Acquisition
- What the Win-Win Partnership Between Apple and Goldman Sachs Means for Payments