Management Strategies

12:35 PM
Arjun Sethi
Arjun Sethi
Commentary
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Why Other Industries May Gun for Banks

Why nontraditional financial services providers are gaining a foothold in banking, and why banks might look to partner with them.

Personally, I find the massive digital disruption of the financial industry most interesting for its hands-on implications. But many observers seem to address the topic as if it were a horse race: banks vs. Silicon Valley. They ask, "Will PayPal, Square, or some other technology company make banks irrelevant? Will Google, Facebook, or Amazon muscle into new territory?" The speculation can be fun but somewhat mystifying when it doesn't answer a core question: Why?

Why would any company -- a technology company or, for that matter, a telecommunications company -- be able to disintermediate the banking industry? In recent months, evidence has started to show us an answer.

Take Fidor, a Munich Internet-only bank. It not only is offering products through a new channel, but it is also reconfiguring those products. For example, its savings accounts have no set interest rate. The rate goes up with social media activity. "The rule is simple," the bank says on its website. "The more Facebook Likes, the higher the interest rate."

The more connected Fidor's customers are -- and the more the customers share those connections with their bank, helping it expand its reach -- the more they earn. Fidor sees social media as not merely a marketing mechanism but also as a component of product design. It even encourages customers to log in via Facebook.

Another example is Moven (formerly Movenbank), which is using social media to redefine creditworthiness. For decades, large credit bureaus have determined individual credit scores based on formulas examining past home, auto, or credit-card loans. But the New York bank adds a person's standing on Facebook, Twitter, and other social networks, as well as analytics on buying behavior from its own transactional data.

To Moven, social media and big data are central to bank operations, so Moven and Fidor show how the banking industry is becoming more like the technology industry. Is it any surprise that technology companies wonder if they could oversee such operations themselves?

And it's not just technology companies but also telecommunications companies. The world's biggest news in mobile money these days is M-Pesa, which is actively used by more than 60% of Kenya's population; about 25% of the country's gross national product flows through it. The M-Pesa is a product of Safaricom, the country's largest mobile-network operator.

Sure, Safaricom has partnered with banks to enable these virtual currency transactions. But it is increasingly expanding into loans -- often very small ones (as little as $1.15). And as it does so, it finds sources of value in its own operations, rather than those of its financial partners. For example, in examining creditworthiness and how to structure a customer's first loan, Safaricom looks primarily at data on the customer's cellphone use, including voice, data, and M-Pesa use.

The Safaricom model is thriving for many reasons. One is that the mobile operator is close to consumers. Thus, it knows consumer behavior and can leverage that knowledge in designing a wide array of financial products. Traditionally, banks have been able to fend off interlopers due to their unparalleled proximity to customer financial behavior. But as so much behavior moves to mobile devices, will banks' advantage really prove bigger than that of a telco -- or a Facebook or Google?

These trends show why the financial services industry is attractive to technology companies (and perhaps vice versa, though banks are usually slower to move). Thus, as we look ahead three to five years, what will be the next wave of acquisitions? Rather than banks eyeing banks or mobile providers teaming with cable providers, perhaps the coming mergers and long-term partnerships will be between banks and technology companies.

Arjun Sethi is a partner with A.T. Kearney, where he leads the Strategic IT Practice for the Americas. He focuses on developing strategies that transform clients' middle and back-office functions and enhance revenue growth. He has led engagements for CIOs of leading North ... View Full Bio

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JohnTFlagg
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JohnTFlagg,
User Rank: Apprentice
9/5/2014 | 11:15:03 AM
Re: Fidor
Generally financial services supply fund individual sector or person. But some financial services are provide irrelevant sector .If you will be a good banker then set up the site essayminions.com  to your future goal. Then you know which one will be  focused on creating a new client investment.  
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
7/31/2014 | 3:20:52 PM
Re: Fidor
Well the news came out today that the CIA has been spying on congress members and their offices. So maybe they can keep an eye on the regulators. If not, I'm sure the NSA would be up to the task.
Becca L
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Becca L,
User Rank: Author
7/31/2014 | 3:17:05 PM
Re: Fidor
HA! Goes back to the big question, who is regulating the regulators?
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
7/31/2014 | 3:09:38 PM
Re: Fidor
I wonder if they ask the regulators to like them on Facebook too. Or would that be a conflict of interest?
Becca L
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Becca L,
User Rank: Author
7/31/2014 | 2:50:58 PM
Re: Fidor
It's a linear relationship.. I checked their facebook page, it currently has 20,523 likes. That translates to 6.8% line of credit. At 22,000 likes it will hit 6.7%, 24k for 6.6%, etc. https://www.facebook.com/fidorbank
Becca L
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Becca L,
User Rank: Author
7/31/2014 | 2:44:07 PM
Re: Social media activity drives up the rate -- how much?
I can't read German, but am sure they are very careful about making promises about FB
likes and corresponding rate increases. I also find it interesting their business model hinges on the success of that particular social media platform. While Facebook seems have more longevity to it than say, MySpace, it's interesting they've built the bank around expectations of its continued popularity.
Becca L
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Becca L,
User Rank: Author
7/31/2014 | 2:19:57 PM
Re: Fidor
Interesting concept. I wonder what the rate change/ FB "like" milestones are.

I'm a bit surprised that model is legal, although I can't think of a good reason why it wouldn't be.. Maybe because it seems a Pyramid sceme-like.  And from Fidor's perspective, it must be a gigantic pain to process the paperwork to regulatory authorities explaining the rate change to FB like relationship.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
7/30/2014 | 1:22:02 PM
Re: Why even become a bank?
Yeah they would have to think that they could do a much better job at serving customers than banks are now to draw customers and be profitable. They'd almost have to come up with a new business model for banks to get it off the ground and sustain profits.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
7/30/2014 | 6:53:16 AM
Why even become a bank?
I really wonder why a tech company would even want to become a bank. Once they get a banking license, they will be subject to multiple regulatory reviews from more than one regulatory body. Is it even worth it? The cost for compliance in FS continues to escalate.
behzod
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behzod,
User Rank: Apprentice
7/30/2014 | 2:15:36 AM
Re: It's still long way...
Ewallets are a great invention without arguing and still they dont completely replace your bank experience. And Google or Apple do not maintain your account in their books, they charge your bank account.
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