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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behzod
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behzod,
User Rank: Apprentice
7/29/2014 | 10:46:44 PM
Re: It's still long way...
I just wonder why would a tech company need a banking licence. Banking is not just about payments processing, but a whole world of other complicated stuff. A Google or an Apple might found own pockets banks but they will still be banks, not tech companies
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
7/29/2014 | 1:17:09 PM
Re: It's still long way...
Different countries have different regulations for getting a banking license. I wonder if one of these tech companies or other non-bank financial services provider might try to get a banking license in a country with less strict requirements. Maybe they could then use that experience elsewhere with being an acting bank to help them get a banking license here, if they think it's worth it.
marccwr
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marccwr,
User Rank: Apprentice
7/29/2014 | 8:51:18 AM
Re: It's still long way...
not so sure about that... If you look at gateways to Ripple for instance - infact they act like banks for both fiat and Bitcoin. New Zealand Coinex even does it with interest on you account. Once people realize that ewallets will be a lot easier, cheaper and most of all more secure to do online-payments, services like Goggle Wallet or Apple wallet will grow that's for sure, and a wallet holding your money with a payments service and possibly even interest on it ... where's the difference with your regular bankaccount? And there's another revolution coming this way: smart contracts - to much to explain in a short messag - you may read on this for example on the Ripple Codius publications. My bet:this e-money related smart contracts will even more rule FI's than just the payments and emoney value storage.
behzod
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behzod,
User Rank: Apprentice
7/28/2014 | 10:55:27 PM
It's still long way...
It is still a long way for tech companies to become financial institutions, and it is likely this time will never come. A google-type company can't just suddenly become a bank. Providing a little bit of financial services is one thing and offiering a whole banking is another. Firstly it is about the legislation, secondly is the banking expertise that only banks have. Banks today start moving along the tech trends. And won't trust my money to a google, i'll go to the bank
Charlie Babcock
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Charlie Babcock,
User Rank: Apprentice
7/28/2014 | 9:19:54 PM
Social media activity drives up the rate -- how much?
"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.'" OK, but do every 100 Likes equal a percentage point increase? .1% increase? .0001% increase? Social media activity drives up the rate-- how much? I going to guess, oddles of activity will result in relatively small increases. And if the pace keeps picking up, the rate of increases will shrink.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
7/28/2014 | 4:16:31 PM
Re: Fidor
It seems like a good way to incentiivze their customers to promote their brand. But I'm sure that it has to have some kind of cap on it. Either that or it takes a lot of likes to increase the interest rate signiifcantly.
Byurcan
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Byurcan,
User Rank: Author
7/28/2014 | 2:48:11 PM
Fidor
Very interesting, so Fidor sets it's interest rates for savings accounts based on how many likes its customers give them on Facebook? An interesting way to entice people to interact with your brand on social media, but is it worth it? And is there a cap, I wonder? Like if they get millions of likes will their interest rates be sky high?
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
7/28/2014 | 1:27:00 PM
Simple Acquisition
I think the BBVa acquisition of Simple earlier this year is a great example of the kind of acquisition that you're describing Arjun. I'm sure there are other banks looking into similar acuqisitions.
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