Innovations in Retail Banking – Part 1
I have been having conversations with many Banking Industry executives on the Retail side of the business over the past couple of weeks. I was struck by two industry innovations, at either ends of the spectrum – one, impacting sophisticated and well heeled customers; the other, addressing the traditionally underserved segments of the market. I will talk about the first trend here today and cover the second one in a subsequent blog.
How you pay for your purchases - whether at the neighborhood grocery or at a restaurant for that fancy Saturday evening dinner or even online, buying your favorite pair of jeans - has profound implications on the entire transaction value chain. The ‘consumer payments’ area, which is industry jargon for what I just described, is ripe for change!
What we all know: Over the past decade, cash ceded its preeminent position to credit, particularly for large-ticket transactions – there have been varying adoption rates of credit cards across countries, but they are here to stay; in the past 5 years, debit cards have seized significant turf from credit cards and have penetrated what the industry calls the ‘micro-payments’ segment, which are in the nature of smaller, diurnal transactions we make for ‘convenience’ purchases!
What next? The explosion in eCommerce has triggered newer payment alternatives to credit cards. Paypal, by dint of being the primary payment intermediary for buyers and sellers on e-Bay, has now become the preferred payment provider online for millions of shoppers, worldwide! Paypal is playing the role of a trusted repository of confidential customer information like credit card numbers and other personal details for these shoppers. While that in itself will not eliminate the ultimate channeling of a transaction through a credit or a debit card, what Paypal is doing as a next step is to create ‘stored value’ franchise – i.e., shoppers will top-up their Paypal accounts, much like debit cards linked to Bank Accounts or pre loaded telephone cards and use that value to pay for myriad transactions on the Internet. In essence, Paypal becomes the primary owner of the customer and quite literally, of the customer’s wallet! Google (now, can Google really be far behind on any of these new technology-led developments?!) offers Google- checkout with a similar strategy in mind. The math underlying all these is pretty simple – US online ecommerce sales (including travel websites) has crossed $ 150 bn in 2006 and poised to enter the double digits as a percentage of total US retail sales.
Capital One launched a ‘decoupled debit’ card earlier this month. Essentially, it is an extension of Paypal’s online strategy to offline or ‘brick and mortar’ transactions, by offering current customers the option of a Capital One (and MasterCard co-branded) debit card even if they do not have a bank account with Capital One. Again, a solid illustration of seizing ownership of the customer through disintermediation of her primary bank relationship! To the credit averse customer, it is like paying credit card bills at the end of every transaction automatically, courtesy Capital One, while earning rewards for loyalty; and here is the kicker - the merchant benefits as well, with lower overall transaction costs and hopefully increased transaction volumes! And if you thought this was the coolest thing, soon your neighborhood grocer or gas station will probably start accepting your Drivers’ License as legal tender for purchases, based on a back end connection between your License and your bank account!
In my earlier blog, I talked about disintermediation and ‘re-intermediation’ as essential stages of the innovation cycle. What we are seeing in the consumer payments space is just that – technology and heightened industry rivalry have spurred innovation, introducing newer, more agile intermediaries into the mix, while cementing customer loyalty. The Head of Payments and Cards at a leading global bank paraphrased this very well, when he said ‘Consumer Payments is an area which is most susceptible to non-traditional competition as you do not need brick and mortar infrastructure any longer to compete effectively’; this sentiment was echoed by another colleague of mine who oversees Clients in the Telecom Industry – ‘A Phone company is as much a bank as your neighborhood bank branch!’ Granted there are privacy and risk sharing issues that need to be ironed out before some of these innovations truly scale, but I am sure industry standards will evolve to address all such concerns.
Innovations like those discussed above address the sophisticated, 'e-enabled' segment of society and in my opinion, contribute to the overall growth of any economy. How about the segment that does not even have access to traditional financial services like a basic bank account? Is the industry innovating enough to include such underserved segments into the mainstream and ensure balanced economic development in a Flat world? As I mentioned at the outset, there are a few innovations, albeit on a smaller scale, that I am aware of. I would like to hear from you as well and post something soon on the topic!