MY FUTURE BANK: MANAGING CONSUMPTION

Other than keeping our money safe and earning diminishing interest returns, the ability to perform transaction and make payments is one of the key reason we choose to deposit money into a particular bank. Banks earn fees from various mechanisms such as overdraft interest, overdue interest, and card interchange fees, payment fees, late charges, etc. These fee-earning schemes gets baked into the likes of payment services, personal loans, micro-credit loans, hire purchase services, instalment services, etc. allowing banks to build a steady base of both interest and fee paying customer. Regulator and technology are now dismantling the tight integration between payment, servicing and deposit accounts. Customers are now open to enjoy the best of these individual services outside of a single bank / service provider. Disintegration of these service bundles is beginning to make banks less attractive and puts pressure on margins when they have to compete on pure play basis, often times using cross-service subsidies or direct discounts.
 
Today, hyper-scale e-commerce companies such as Amazon and Alibaba have a major share of the retail transaction market. Of late, through its Prime offering, Amazon have successfully turned consumption into repeat subscription funnel. Such moves (and many others to come) may mean one day these players can easily offer competing FI-related services such as small deposits, lending and payment services. Their effective engagement model focusing largely on value extraction and value realization platforms meant they are capable of owning and growing customers day-to-day consumption needs. The ambition and appetite of these technology savvy companies seems insatiable and unstoppable (source: https://thefinanser.com/2014/03/data-wars-why-google-apple-facebook-and-amazon-will-eat-the-bankers-lunch.html). Consider the strategic decisions by these players have already made as far back as 9 years ago:

• PayPal and Google have invested over $1 billion in their mobile payments processing operations between 2009-12, amounting to more than the amount venture capitalists invested in all mobile financial start-ups during the same period;
• Facebook has a head of Financial Services to build their financial business, and has created strategic partnerships with PayPal, Stripe and Braintree;
• Amazon hired 650 people to improve their payments processing operations in 2013; and
• Apple has all the infrastructure to takeover payments from authentication (TouchID) to wallet (Passport).

 The non-banking player assault are usually 2-pronged:

1. Driving continuous customer engagement via enriching customer experience. This is done mainly through repeated value realization and capability enablement.
2. Amassing useful and relevant customer data and insights by driving customers towards platform driven engagement.

Sensing the threat and opportunity, fellow bankers reacts (most of them only recently):

1. Build and strengthen ecosystem positions by offering API-driven banking services consumed by third parties such as 3rd party financial service provider, merchants and e-commerce companies
2. Retain and grow digital customer base by transforming to ‘frictionless’ banking services by simplifying processes, automating tasks and creating seamless value extraction services via banking and partner channel.
3. Transferring cost from one BU to another, especially for fee-based services for cross-sell products in order to boost consumptions & engagement, e.g. discounted FOREX fees and international withdrawal fees when ordered Online via Apps.
4. Retrofit current core capabilities by converting banking app into everyday social-payment app, akin to what WeChat have achieved in China – by embedding low cost and customer friendly payment functions; imbuing it with the genetics of banking security and trust; and bolstering user experience by offering emoji-driven chat and personalized services.
5. Sell ‘anonymized’ and ‘aggregated’ customers data to 3rd party such as spending habits and frequented products/services.

 
Some of these services have the unintended effect of turning banks into a ‘dumb pipe’ where customer engagement is further from the moment of truth. Without the engagement, useful data becomes unavailable and may cost banks money to possess in the future. Others are forced and belated reaction by banks to reorganize their services around meaningful customer needs. Yet, the worst kind of actions are the ones that gives valuable data away for short term and temporal returns.

There is a sense that a lot of the efforts offered too little too late to reverse the longer term declining trends for bankers. What is missing then? I personally think bankers are largely still grappling with the right operating model in the emerging digital future. A lot of these experimentations are wild shots and often times, desperate media shout outs. They lack of strategic business alignment; poorly designed for learning and experimentation; ill-focused on monetization and not positioned for sustained digital advantage build-up. To understand where bankers are lagging it is worth taking a look inside the actual disruption, i.e. the pace, scale, capabilities and depth of relationship non-banking players are fostering with their customers. E.g. how hyper-digital players continue to bridge the gap and build capabilities for their growing customer base. To ensure sizeable economic benefits are passed on to their customers, they will drive various value-driven customer engagement initiatives at very large scale. This creates attractive value-proposition to customer and in turn attracts capital for continued expansion. Such customer related value initiatives includes:

1. Fulfillment capabilities – logistics coverage, quality goods with guarantees, choice, ease of service engagement, intelligent automation, tracking and accounting services (financial and services related). This is where Amazon and Alibaba have excelled. Yet, there is still plenty of room for improvement.
2. Search and discovery – Often times, things come up unexpectedly and there is a need to respond. Other times, occasional benchmark spend values, recommendations on items of interests, etc. would be useful when it is truly personalized. This is where the asymmetrical business model players do well in general search/discovery such as Google and Facebook while e-commerce does exceedingly well in targeted, mirrored response style of search/discovery.
3. Maintenance Management – some of or physical assets may require servicing and maintenance. It is always a pain to find the right after-sales servicemen to perform these niche work.
4. Incidental spends – impulse buys, opportunistic purchases, captive purchases (i.e. in a concert hall, cinema, event venue, etc.), emergency payouts, unplanned spends, etc. This is the space where there a good portion are cutoff from normal corporate planning logics and others are mostly location specific. FI-oriented payment facility will prove extremely useful.

As you read through the list above, you find little that a bank can offer. Bankers may be caught in a difficult position as they are not e-commerce players and are not allowed to take excessive risk with their clientele’s deposits.  Which is probably why China and Singapore government might consider (or is already) allowing bankers there to increase participation in certain non-banking type of risk taking.

Other bankers are experimenting with “Banking Inside” approach similar to what Intel has done with its widely successful “Intel Inside” campaign. The approach of building Banking-as-a-Service business model is something fairly new and will take time to prove viable. Banks need to build a sizeable ecosystem and an extensive knowledge of their partner/customer in order to become a viable core platform (e.g. see BBVA’s approach to API). It is however, limited response from the banking community. They are largely taking a fringe position from core innovation happening in the actual market place. China is already providing the world a glimpse of what is going to happen to traditional banking in the face of relentless innovation pursuit by tech players there. For example, news headline such as: “China’s Banks lost $22B to Alibaba and Tencent in 2015, But that’s not their Biggest Problem”. Source: https://www.forbes.com/sites/zennonkapron/2016/03/06/china-banks-lost-22b-to-alibaba-and-tencent-in-2015-but-thats-not-their-biggest-problem/#4f4e69ae6094

Things will get worst not just for bankers but for other retailers and brand owners once voice or image based search comes into play as it offers unprecedented opportunity for these tech players to both harvest data and engage customers. As these AI’s build trust and advancements, customer will grow more comfortable and dependent on built-in recommendations to help make day-to-day consumption decisions. Such gatekeeper devices, being imageless and textless, will essentially mask away complexity associated with the traditional brand medias and turn consumption into ‘noise-free’ and ‘frictionless’ experience (source: L2's Scott Galloway’s presentation here: https://www.youtube.com/watch?v=GWBjUsmO-Lw). In this scenario, most brands (banks included) will become mere ‘dumb pipes’ of goods and services, all to the advantage of marketplace platform innovators. The relief is, banks are not alone.