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!
Comments
This is a great post. I was reading and just about to comment on the 'unbankable crowd' and I made it to your last paragraph. This segment of the market is growing fast. In the US people without a bank account are in the tens of millions and around the globe in countries like Russia that number is a much higher % of the population. Other Central and South American countries just do not have deep penetration of credit cards in the local population. In Africa, more people have cell phones than bank accounts.
What do all of these jurisdictions have in common? Digital currency. Online money which is not a part of the traditional banking industry and is also not regulated like a bank or traditional institution. In Russia and some of those surrounding States, Webmoney is very popular and integrated into main stream life. People with cash can walk into a local WM agent, deposit cash and get digital money credited to their online account. They can pay bills, shop online or send money anywhere in the world without the use of a bank, the fees are low plus there is no credit required. They sell prepaid WM loading cards (even from vending machines) all over large cities there. Loading via prepaid cards accounts for about 30% of their total account funding. The PIN codes are even sent via email. That would be the equivalent of a PayPal prepaid card hanging on the rack in a local US 7-11 store? Banks aren't needed when you have digital currency.
Have cash? Want to shop online? Throughout Europe, the UK and Ireland shoppers can walk into any one of over 200k locations with cash and buy a Ukash voucher. Then on their PC or cell phone use that stored value voucher to shop or spend. Thousands of web sites are now accepting and catering to this type of 'buy online, pay in cash' solution. Paidbycash is a new US example and one that comes to mind. Amazing, Ukash can also be used to instantly fund a Webmoney account. So although there may not be a local WM agent in your local German town, you can still load cash to your Webmoney account with Ukash. I think what has happened in the past few years is that populations without a bank account or wallet full of plastic, are finding solutions to shop, spend and transfer money online. Very smart financial operators are coming up with solutions which cater to these cash spenders. As it turns out, some of these solutions are faster, cheaper and easier than traditional banking. Most are definitely more secure. In Canada, I have clients that visit xGold.ca each month, spending digital gold currency (Pecunix) to pay their local electric, cable and gas bills. Even mortgages and local shopping credit card bills can be paid with digital gold currency. xGold.ca offers digital money - to - online bill pay solutions for digital gold currency users. While the electric company still does not accept digital gold currency, there is an intermediary agents making that jump for his client and a profit supplying that much needed business. The visitor paying his bills online there, does not need a bank account. Tons of the financial solutions are springing up, some like Webmoney have been around for years but have only recently gained in popularity along with their demand. Having just over 4 million accounts they are not in direct competition with PayPal and don't have to be in order to have dramatic success with this growing online population.
Posted by: Mark Herpel | June 21, 2007 12:08 PM
Just on reading your post, I became thoughtful on whether we really need to get involved with bank accounts and credit cards. It's evident countries without deep penetration of credit cards have fewer financial problems. On the other hand, it's very difficult to admit that all of credit card users will suddenly move on to web money and web money accounts...
Posted by: Selena | June 25, 2007 08:22 AM
Talking about innovations in Retail banking let me introduce you to co-creation.
I am currently working at Setlabs trying to apply co-creation in retail banking. The idea is to involve customers across the value chain activities from creating new products to deciding the channel and order of consumption e.g. design new products, distribute channels, support products.
At the same time, we want to increase customer experience by fostering networks and creating experience environments in banking.
All your suggestions and ideas are more than welcome.
Posted by: Rogelio Garduno | June 28, 2007 05:32 AM
Fascinating. In the context of consumer payments I often wonder what the "elasticity" of offering a multitude of options/innovations is - when does the scale slide from "convenient" to "overkill" or even downright "too risky?" (Maybe I am just old fashioned.)
But in my mind, a precondition to a successful innovation is getting the customer segmentation right. You spoke about the sophisticated segment being e-enabled, and one of the responses talked about online money for the unbanked. So what really should be the basis for segmentation in order to target consumer payment innovations - demographics, behavior, geography...? The co-creation concept sounds promising, in fact I do believe innovative banks are doing this.
Look forward to reading more posts and comments on this topic.
Posted by: Sujata Banerjee | July 1, 2007 06:22 AM
Impressive article though at the end of it the focus was brought back on micro payments and consumers without bank account. Problem with most of the new digital currency platforms is they are not integrating back to banking channels as ultimately if they are not able to convert these into bank account holders they wont be able to draw real value of pushing financial products which are mainly loan based. ITZ Cash Card project by ESSEL Group is doing something similar to web money. Though their mode is still the merchants which are accepting them to push its usage.
Posted by: Siddharth Puri | July 5, 2007 02:22 PM
E money can replace physical cash only if it can cross the barrier of requiring literacy and tech savvyness by user. Innovations can succeed in the third world countries only if they can be used by masses who are illiterate.
Preloaded smart cards, in the size of pendants, that can be dangled around neck/waist can serve as money purse.
For security, there can be combination of finger prints coupled with a numerical PIN can do the job of cvv number and PIN.
Preloaded smart cards, as against Debit cards, eliminate the need to have a bank account, and can be recharged at banks/other vending points.
Posted by: J J Rao | July 11, 2007 10:14 AM