Imagining the Future of Retail Banking

October 6, 2009

predict_future_2009

Reading the various reports from Finovate 2009 got me wondering what all of these new developments portend for retail banking.

A couple of future scenarios come to mind:

  • The Competition Scenario
    Currently, banks compete mostly on rates, offers, and intangibles. There just hasn’t been that much else to differentiate them. With the recent flurry of online and mobile applications, however, the next phase of competition could very well focus on products and features. Of course, this phase would necessarily be short-lived.  Not only are products easily replicated, people have a limited appetite for novelty.  Still, for the short term, product innovation could be the hot ticket.
  • The Mashup Scenario
    This is one I’ve talked about before. Consumers may opt for an a la carte approach to banking—a financial version of the daily me. In this scenario, the “bank” would be a mashup of online and mobile applications, reflecting the individual consumer’s needs and preferences. The consumer would select applications, a la carte, from a universe of brands. It’s unclear how traditional banks would fit into this scenario.  Possibilities could include application providers, aggregators, or links to the brick-and-mortar world.

Is it just me, or is there something about all this that feels like dotcom fever?  Mint’s recent sale to Quicken seems to have had an impact.

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Posted by tombrzezina

Bank Competitors from the Digital World

June 29, 2009

Not only are online competitors growing in numbers, they are doing so with increasing variety.  FinovateStartup, a recent online conference for financial and banking technology startups, listed 57 participating companies.  Types of services included:

  • Online Banking
  • Peer-to-Peer Lending
  • Personal Financial Management
  • Investment Management
  • Payment Services
  • Mobile Banking
  • Financial Marketplaces
  • Mortgage Brokers
  • Bill Reduction
  • Credit Reporting
  • Debt Reduction

While most brick and mortar banks have been offering online banking services for years, pure online players are gaining ground.  Everbank, Ally Bank, E-Trade, Charles Schwab Bank, ING Direct, and HSBC Direct are among the online banks recommended in the July, 2009 issue of Consumer Reports Money Advisor.

These banks offer some very attractive advantages over their traditional counterparts:

  • Lower fees
  • Higher rates
  • Enhanced security

According to the same article, online banking can actually be safer than traditional methods because there’s less of a paper trail, and your transactions are digitally encrypted.

But banks are only one of the categories of online competitors.  Peer-to-peer lenders like Lending Club and Prosper are becoming more popular for both their borrowing and investment opportunities.  Personal financial management players like Wesabe and Mint are growing, too.

These and others might be considered niche players, but it’s wiser to think of them as specialists.  I can easily see a future in which my “bank” would be a personal mashup of specialized online or mobile services.

The kicker is that I don’t see much evidence of traditional banks treating online competitors as a serious threat.  Why not?

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Posted by tombrzezina

Is Lending Club the Business Bank of the Future?

June 10, 2009

lending-clubGetting a loan is tough for anyone these days, but it’s especially challenging for the small business owner.   Most small businesses don’t have assets that larger businesses can use as collateral, so bank loans are, for the most part, out of their reach.  As a result, owners are increasingly turning to alternative sources for funding.

That’s where Lending Club comes in.  A self-described “social lending network that brings together investors and creditworthy borrowers to offer value beyond traditional banks.”

The Trend
The concept is catching on fast.  There are a number of players in the market, including Zopa, Prosper, and Virgin Money. I’ve chosen Lending Club for this post because it seems to be the current growth leader.

Here’s what happened from January 1 to May 31, 2009:

  • 60% growth in total loans issued by Lending Club, from $25M to $40M
  • 70% growth in total Lending Club membership from 82,000 to 140,000
  • 72% growth in loan applications, from $212M to $365M

According to a Lending Club onsite satisfaction survey, 89% felt Lending Club met or exceeded their expectations. Borrowers love it for the rates—fixed interest rates as low as 7.37%.  Lenders love it for the returns— average net annualized return of 9.73%.

According to Chris Keating of Iconoculture, 10% of loans will be peer-to-peer by 2014.

One Possible Outcome
Around one third of the money borrowed currently goes to small business.  With high unemployment levels pushing many out-of-work men and women into starting their own businesses, that one third could easily become two thirds.

 In interviews I’ve conducted with small business owners, a recurring gripe is that years of loyalty to a bank mean nothing when it comes to applying for a much-needed loan.

 With an alternate source of funding—like Lending Club—there would be little reason for small businesses to curry a bank’s favor.  As a result, banks could be relegated to the role of pay-for-service vendors.  They would be commodities.

 Community banks have an opportunity here.  With a willingness to lend and some innovative thinking, they could avoid this scenario.  It seems to me that we’re on the cusp of a small-business revolution.  The banks funding this revolution could enjoy a very, very bright future.

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Posted by tombrzezina