Are Banks Obsolete?

Listening to bankers at a few conferences as they try to define the value banks can provide customers reminds me of Dean Acheson’s comment on Great Britain in the Fifties: “Great Britain has lost an empire and has not yet Are Banks Obsolete? image 272113 l srgb s glAre Banks Obsolete?found a role.” Many banks, not to mention eager-to-be helpful banking consultants, are struggling to protect or expand the role of banks in their customers’ lives. They are rarely very convincing.

Here are some trends from Money2020 in Las Vegas last week, and from SWIFT’s Sibos international banking conference in Dubai a few weeks ago that I sort of picked up on. I say sort of, because some of the talk was so vague or so disconnected from reality that I didn’t take very thorough notes. Reviewing my accounts later, I concluded that like the dog that didn’t bark, the absence of persuasive arguments for banks was in itself interesting.

Some banks want to engage with their customers and become trusted financial advisors. Unfortunately, the banks have been busy driving customers to relationship-free self-service channels like online, mobile and ATMs, so they don’t have much of a relationship to build on. And while banks used to think that trust was their big advantage, consumer trust in banks has dropped. Customers don’t particularly like their banks and would think nothing of switching. One speaker said customers have only a third of their financial assets with a bank, and I think that sounds high. (There are a possible few exceptions, like Wells Fargo and USBank which have worked hard to build closer customer relationships crossing multiple products for greater wallet share.)

It’s a little late for banks to think they are going to be trusted financial advisers and have the fabled 360-degree view of their customers’ finances. Investments moved to Fidelity, Vanguard, Charles Schwab and similar retail investment firms years ago.

So what else can a bank do?

I’ve listened to banks proposing to act as trusted intermediaries between individual buyers and sellers — named the Digital Asset Grid at Sibos last year – and wondered if they had ever heard of Craigslist or eBay. Why would buyers and sellers register with a bank to accomplishi transactions they can do fairly well through existing platforms? Others have talked about providing guidance in purchasing consumer goods — something Amazon, for one, already does well.

In fact, at Money2020, Amazon announced that flyers can now pay for Gogo wifi on planes by logging in with their Amazon credentials rather than digging out a credit card while trying not to knock over anything on the seat-back tray. Facebook explained how it increases sales by reducing the amount of information it asks for on its site. How did Amazon get ahead of banks in providing trusted credentials and streamlining payments, or Facebook take the lead in streamlining online payments? Where were the banks?

Deb Liu, director of Facebook’s payments and mobile app ads, explained how the company tests and tests and tests, reducing the amount of information it asks for when taking credit cards, and then testing some more. Somewhat to its surprise, Facebook found that asking for the member’s zip code increased conversions by 1.4 percent.

Some of the biggest innovation in payments is coming from outside the banking industry. Kausik Rajgopal, director at McKinsey, said that Starbucks and Target see payments as a way to change commerce.

In Kenya, M-Pesa came out of the telecommunications company, Safaricom, which gave it a big potential customer base to start with. PayPal had a similar advantage as part of eBay.

If banks want to become digital sales organization, as one banker suggested, they have to overcome their own organizational silos. A bank that can tell from browser activity when a customer is preparing to buy a car still faces problems because the P&L for originating a car loan would go to the branch, not the back office.

“So it is hard to get started,” explained a banker. “The sales organization will be detrimental to innovating in cyber banking. We are bringing in technology solutions to markets that don’t have a service or operational side.”

Another banker asked “Where consumers want to go, can banks keep up?” (Again, apologies for missing attribution, but in some sessions at Money2020 on the banks of the future, most of the commentary was so mundane I wasn’t following it closely.)

One obivous innovation, useful to anyone who travels to Europe, would be chip and PIN credit cards, which banks are studiously avoiding, leaving the leadership to credit unions linked to the UN, the State Department and Andrews Air Force base, although Bank of America is apparently beginning to offer them to corporate accounts and BOM offers a chip and PIN Diners Club card.

Maybe bankers should be asking whether innovation is such a great idea, or how much innovation is enough. Peter Vander Auwera, who leads the Innotribe innovation program at Sibos, said banks should ask whether they are creators or removers of friction. Innotribe didn’t seem to have many useful answers, although participants rather ambitiously claimed credit for informing bankers about cloud and mobile, topics I am confident bank technologists were well aware of before Innotribe. They also seemed to move in some parallel universe more like Woodstock than today’s commercial banking — a world of love and trust. Not a word about such real-world practices as the English banks facing billions in repayments and penalties for mis-selling products to customers.

If bankers have problems defining themselves their firms internally, at least a few must be aware of growing competition outside, even in some unexpected programs from American Express.

Dan Schulman, group president, enterprise growth at American Express, gave the most surprising presentation that I saw at the Money2020 conference. Noting that more than 1,800 bank branches have closed over the last several years in the US, he said many Americans don’t have access to a bank. Others are annoyed at the high fees that banks charge.

AmEx has responded with two initiatives. Serve is a platform that works with smartphones to provide almost all the features a bank can offer, including direct deposit, remote check capture and bill pay. Account holders get an American Express card they can use in stores. Starting this fall, Serve clients can add cash to their accounts at 14,000 CVS stores and many participating 7-Eleven stores free of charge.

Bluebird, a prepaid card launched with Walmart almost a year ago, now has more than one million accounts.

“We see customers live their financial lives on the Bluebird platform, paying bills, writing pre-authorized checks, and shopping at merchants who accept the American Express card,” Schulman said. Eighty-seven percent of the Bluebird enrollees are new to American Express and nearly half are under 35, he added.

“The penetration of mobile phones truly has the potential to disrupt the prevailing wisdom that it has to be expensive to be poor,” he said. “I think we are entering the era of the nonbank — consumers have all the power of a bank branch in the palm of their hand. Technology will redefine the world of consumer retail banking.”

A former AmEx employee I spoke to thought the company would have difficulty pushing low-cost cards to relatively poor people while marketing exclusivity of its fancy gold, platinum and black cards to the rich. But Schulman said prestige card holders actually had a higher opinion of American Express once they learned of its programs aimed at the unbanked. Another observer said the new card would help Amex get into retailers who have resisted its higher fees.

Bankers want to do more than hold funds securely and make loans. It just isn’t clear they have identified a road to expansion that customers will want.

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