Could the current account mortgage, such as the Virgin One account available to homeowners in the United Kingdom, disrupt the traditional U.S. retail financial services model?
Yes, says Clayton Christensen, a professor at the Harvard Business School. In fact, it's just one of many "disruptive innovations" taking place in financial services (see chart).
A disruptive innovation is one that's simple, inexpensive and adequate enough to undermine existing offerings. A prominent example is the way that retail brokerages disrupted full-service brokerages, and in turn were disrupted by discount brokers and online brokers.
Now, the banking industry faces another potential disruption-the current account mortgage.
Current account mortgages act as replacements for separate mortgage, checking and credit card accounts. As paychecks are directly deposited into the account, the balance declines. Conversely, checks and credit card transactions increase the overall balance, up to a ceiling set by the lender. There's no explicit mortgage payment per se, although the lender keeps tabs on overall progress toward the borrower's financial goals and can adjust lending limits accordingly.
One account means one rate-there's no spread income between high-rate consumer credit and low-rate deposits. However, all-in-one accounts, which Christensen dubbed "hairballs," present ample opportunities to earn a profit, through increased share of wallet and easier access to credit.
"There are advantages to offering a product that's a 'hairball,'" said Christensen in a speech at the BAI Retail Delivery conference in Anaheim, Calif.
Essentially, the current account mortgage is a cash management account for people whose balance sheets gravitate toward debt rather than equity. As such, the product meets Christensen's first litmus test for detecting disruptive innovations: it targets people with a relative lack of money or skills, at least compared to those who can afford to open a Merrill Lynch Cash Management Account.
The other litmus tests ask whether the innovation aims at those delighted to have simplicity, and whether it tries to better serve existing needs rather than create new markets. On all counts, the idea is potentially disruptive.
Several U.K. banks have bought into the concept. "The Virgin One account has been around since '96," said Paul McAdam, managing director at Innosight, a consulting firm based in Woburn, Mass. "Virgin was the innovator in this area, but now they've been copied by three or four different banks, some of which have a better offering."
However, it's questionable as to whether the product would easily translate to the U.S. market. There are some serious regulatory and tax implications that have yet to be worked out, such as the deductibility of interest payments on a balance combining consumer credit and mortgage.
Also, banks relying on outdated systems would have many challenges to overcome. "From a legacy systems standpoint, mortgage systems, credit card systems and deposit systems are still separate, so it would be a pretty huge task to pull this off," said McAdam. "A new entrant starting from a lower scale standpoint could probably do it much easier."