Banks sighing with relief at having survived what the GFC has thrown at them thus far should not be so smug, since few are equipped to deal with the seismic revolution in banking being wrought by technology and demographic shifts.
“The business models of banking are broken,” according to Jeff Carter, founder of the Bank of America/MIT Center for Future Banking.
Speaking in Sydney yesterday Carter, who left Bank of America five months ago, said most banks were still struggling with capital upgrades and risk models and that “A lot of the fundamentals of banking are still in distress.”
Meanwhile banks are struggling to meet the needs of an exploding networked economy and a customer base racing to adopt online banking offerings.
Carter said the pace of change meant that while it took Bank of America three years to secure 1 million online users, it took just 12 months to attract the same number of mobile banking users.
Carter was a speaker at the AMP Amplify 09 conference, its third showcase of international innovation. He said that the Center for Future Banking had identified three key issues which banks needed to consider when mapping future strategies: information, networks and identity.
“In the not too distant future every person, everything and every place will be connected.” For the banks that meant “New networks that emerge will be highly disruptive.”
He believed traditional banks could find themselves squeezed out as new business models emerge, offering the example of Google and HSBC’s collaboration where companies registering for internet banking with HSBC get £75 worth of free Google Adwords.
“Google doesn’t want the payment – it wants the information before and after. Banks could be completely squeezed out of this if other organisations control everything before and after the payment,” according to Carter.
Not that the banks are currently equipped to manage the information flows that will emerge as new banking models emerge. The core systems revamps which most banks are currently performing are only tinkerings compared to the radical overhaul needed in the future.
But before they can rework themselves for the future, banks need to survive the present. Dr James Gardner, who heads a 150-strong innovation and research group at Lloyds TSB, also speaking at Amplify 09, said that bank CEOs needed to develop the equivalent of a ‘canary in a coalmine’ which could alert them to potentially lethal new competitors.
He provided the example of online payments provider PayPal, which for years was not taken seriously by bankers, but which he warned could next year be handling 30 per cent of the world’s online transactions.
“They are all asking how exactly did we allow this to occur,” said Gardner, who suspects there is no longer a competitive response available to banks seeking to ward off PayPal. Initially dismissed as a geeky solution, the banks continued to ignore the company as it forged relationships with credit card companies, even when it launched its own card, and then when it launched a mobile banking platform.
It was only when PayPal secured a banking licence in 2007 and more account holders than any other financial institution in the world that it became impossible to ignore.
“This kind of threat is endemic across every section of our industry,” warned Gardner.
He said banks needed to abandon the top down command and control attempts to manage competitive threats, and rather create an environment where staff and even customers shaped the sorts of banking product and landscape they wanted, effectively becoming the canary – and providing early warnings to bank executives about looming change and competitive threats.
He said banks needed to be on the lookout for threats in terms of the experiences available to clients (eg., WellsFargo’s Stagecoach Island in Second Life), emerging banking models (peer-to-peer lending), distribution systems (mobile banking), new markets (Vodafone’s m-pesa which allows people without bank accounts to use their mobile phone to send and use credits) and products (Barclaycard Oyster).
Gardner, whose book Innovation and the FutureProof Bank will be published by Wiley in August, said Lloyds TSB was beginning to run experiments that encouraged staff and customers to have a say in how products and services were structured.
The bank has been developing, for example, a prototype to allow customers to go online and build their own internet banking system using drag and drop tools, and based on customer feedback have designed a prototype keyfob with a single button that when pressed automatically displays a customer’s bank balance.