In 2010 we had a bunch of innovative ideas become mainstream and start to impact the banking arena (for a full coverage see my other post.) However, 2011 promises to be more disruptive because as the economy finally starts to warm up, we'll be seeing a lot of new private equity investment into start-ups in the finance arena.
A new dot com boom?
The intersection of interaction design, mobile technology, mobile payments, social media interactions, geo-location technology and augmented reality is producing a land grab for innovative new start-ups. We've already seen quite a few investments in new banking start-ups in 2010, which are the early stages of a new boom in the mobile tech space. Right now we're not yet in the bubble, obviously, but as start-ups grow revenue, as investments start seeing huge multiples, and as the success of start-ups generate even more new business ideas, then this zone appears ripe for an emerging boom. Add into the mix the dissatisfaction en masse with the finance sector, one area where there is sure to be heady action is in the alternative banking and finance game.
Already we've seen start-up investments in peer-to-peer lending (Zopa, Lending Club, Prosper, Kiva, etc), payments alternatives (i.e. Jack Dorsey's Square), Personal Finance tools (Geezeo, Mint, GreenSherpa, Blippy, etc), and even in Banking itself (BankSimple, MovenBank).
In September of 2010, Think Finance secured $90 million in start-up funding for their Elastic web-based bank account replacement. Elastic's services to the underbanked will somewhat overlap with BankSimple's approach to online banking. But, the CEO of Think Finance, Ken Rees, doesn't see BankSimple as competition. From Mashable:
We celebrate all of the innovators in the space that use technology for banking purposes. They [BankSimple] are more focused on the needs of prime consumers. We're focused on the underbanked and unbanked -- the estimated 60 million people who are not well served by traditional banks," says Rees.
Jack Dorsey at Square is catering for a gap in bank service performance demographics also. Dorsey is aiming Square at the approximately 30 million small business owners in the US that don't have a merchant account or credit card terminal. With only 6 million businesses in the US that can currently accept credit card payments, this shows there is huge growth potential for thinking outside of the box in respect to banking and payments models.
The growing innovation and infrastructure gap
The problem for the finance sector with the current level of investment in infrastructure, and old stagnant business models built largely around physical distribution paradigms, is that increasingly we'll be dealing with start-ups and innovators from outside the traditional banking arena. This will increase the gap between customer experience or in real terms, customer behavior, and the actual state of play in the industry.
While the sector as a whole tries to deal with the devastation of the global financial crisis, and uses this as an excuse to hunker down and resist strong investment in technology and so forth, this opens the gate for innovators who are prepared to invest to take customer mind share, and capitalize on both the wholesale dissatisfaction of the industry in general and capturing the imagination of customers through the use of technology and better interface processes.
The 3 Phases of Disruption - Impact on the Finance Sector
For those of you who have read Bank 2.0, you may recall the "3 Phases of Behavioral Disruption" which identify the emergence of Internet, the take up of mobile smart phones and "app" phones, and finally the integration of payments technology and services into the handset. There are two broad opportunities within these 3 phases of disruption for adverse impact to the traditional financial services space.
The Infrastructure Gap
The first opportunity lies in the inability of banks and financial institutions to invest in customer facing technology ahead of the curve, which creates a considerable lag in capability. Banks keep looking for ROI, but at the rate that new technologies are being adopted these days, if you wait for ROI you're already 2-3 years behind the competition. Banks have to make bets on a number of emerging technologies, experiment and adapt through iteration, rather than wait till a dominant player or platform emerges (which is unlikely in any case) before making strong investments.
In this gap we have players like PayPal, cloud services, direct banks (e.g. ING Direct, UBank, Jibun) and other platform opportunities who are doing it better on a technology platform basis than the traditionals. The opportunity here is for start-ups to leap ahead of banks who are straddled with outmoded legacy systems which simply are not robust enough to work in an always on, superconnected space that customers live in today.
The Behavior Gap
The behavior gap, however, is where the really interesting stuff is happening on a business model front. The gap in behavior is defined in anticipating the ways customers work with new technology and reinventing both the user interface, the interactions and the processes and rules that support the engagement or journey.
Banks are generally enamored with their existing, stagnant model of banking -- they find it difficult to imagine a world where mobile applications and internet banking are more popular access methods than branches, where checks no longer cut it because I can SMS or bump money to an associate, and where I am not penalized because I don't want to follow some archaic risk model. Companies like Square, BankSimple, even Apple and Google who are reinventing the interface to the customer are capturing the hearts and minds of customers everyday, while banks continue to frustrate customers with old models, outdated rules of engagement, and with broken processes and channel support mechanisms.
Conclusion
The biggest risk to the finance sector today is not from other banks, nor related to the inability to apply Basel III risk controls or standards. The biggest risk to the finance sector today is the growing gap between the institution and the customer. The rate at which this gap is opening up is increasing rapidly, as the adoption of newer technology increases too. This is where we are going to see an explosion of start-ups and new businesses who aren't afraid to reinvent the bank customer experience. This is where the banks who do get customer and try to reinvent the journeys customers are taking will win.
It's also where banks who wait for ROI, or wait to understand the impact of social media, mobile, near-field contactless payments and other such technologies before investing, will lose out massively.