Bank 2.0: How Behavior Is Fundamentally Driving Change

Last week I had the pleasure of attending a session with some senior members of the banking industry. The key attraction was to hear from Brett King, author of Bank 2.0.

It was a really interesting discussion and I really enjoyed both Brett’s logic and the way he weaved a narrative around how the banking world status quo is rapidly shifting.

Much of what follows is word for word from Brett’s talk, so I give full attribution to him:

There is a feeling in the banking sector that to some extent banking is immune from the forces that affect other types of businesses because, after all, it’s banking and financial services, as a basic concept, hasn’t changed  since the ninth century A.D. when Persia first issued a check. So you could be forgiven for thinking that banks struggle with innovation.

And yet, there is innovation occurring today in banking. We have mobile phone and iPhone banking, we have Internet banking and we have other types of innovation as well like CFD’s.

Banking, however, is pretty much a utility. You turn the switch and the light comes on.  We don’t say wow the electricity worked today, and it’s the same when we go to the ATM and put our card in and cash comes out. We expect banking to work, we expect banking to provide us with that functionality. It’s when it doesn’t work that there’s a problem.

But just like other utilities, to play in the banking space, to own part of the wires, and to own part of the network and have access to this you need a banking license. So for a long time bankers felt protected by the fact that they have a banking license. So the competitive barrier to entry is there. How do competitors come in unless they get a banking license?

As a result, the meter, the traditional access to the customer hasn’t changed much because there hasn’t been a huge imperative to change. Why? Because banks define the rules. If you want a mortgage you have to meet my requirements as a bank. And if you’re not interested in doing that, fine, go find someone else. And that’s traditionally the way we have been treated by banking.

Banking has not so much been a service as such to its customers as a privilege and “we’ll charge you for the right to have that privilege”.

This is where things are changing, this is the difference that we face today as a result of three very strong disruptive behavioral changes.

Here’s an illustration of this point. In Hong Kong the Octopus card is a stored value smart card using contactless technology. It’s similar to Oyster in the UK. Essentially you cash up this card and use it like a debit card for transactions on the public transport system. You don’t need to swipe it or stick it in a point-of-sale [POS] terminal. You can actually have it in your wallet and just hold your wallet to the POS terminal and it works. This was introduced in Hong Kong in the late 90s to replace paper ticketing for the public transport system.

There is approximately a population of 7 million people in Hong Kong and there are over 12 million of these cards today. This means that not only does everyone in Hong Kong have one, but when you’re a tourist and you visit Hong Kong you also get one of these cards.

People began thinking as they used these cards every day, why can’t it be used to buy a coffee at Starbucks as well? And so very quickly after Octopus became ubiquitous, you started to see for example Starbucks put in a POS terminal and similarly for other products and services. The problem was that within nine months of this occurring, ATM cash withdrawals reduced by 13%.

The banks weren’t happy and they went to the Hong Kong monetary authorities and alerted them that Octopus was acting like a bank.

“They are taking deposits and you have to stop them.”

The Hong Kong Monetary Authority looked at Octopus and agreed with the banks–they then issued Octopus with a banking license for deposit taking.

So what is interesting is that this is not a bank but it looks like a bank and behaves like a bank and replaces some of the banking functions–sounds a little bit like PayPal.

In Kenya the big four banks have about 750 branches and the oldest bank has been around for more than 80 years. The mobile banking service m-pesa  was started in 2006  by Safaricom,  a communications company, which went to the banks and said we think this is a good idea and want to partner with you. The banks concluded that there was no money in this area and declined the offer.

A few months later those  same four banks went to the regulators and said you have to stop m-pesa–they are a threat!

“They are doing banking.”

M-pesa now has 11 million customers, compared to the 3 ½ million customers across the big four banks.They have 18,000 outlets and do 10% of Kenya’s GDP. Compared to Western Union, m-pesa does more business in a month than they do in a year. They started in 2006, they are not a bank– they look like a bank though, don’t they?

We are seeing the meter being reinvented, and it’s not involving banks.

The banks still have the backend wires and processing. HSBC is very proud of the fact that they act as the backend settlement process for PayPal. Wouldn’t it have been better for them is they actually were PayPal who have a market cap of over $40 billion?!

What is traditionally known as banking is under threat from non banks, from telecommunications companies, from Apple, Google, PayPal–from nontraditional competitors.

It’s hard for banks to really adapt. The last great banking innovation was the ATM. Because banks cannot claim that the Internet or mobile phones are a banking  innovation. All banks have done is adapt to other inventions. When we talk about innovation in banking, we tend to talk about innovation in financial instruments.

We don’t conceptualize innovation in the banking industry as innovative business models, innovating customer experiences–we think banking is an art, banking is a science and there’s no need to change the fundamental way we do banking.

Banks today are like a big ship, a massive supertanker,  that has been built up over a long time, big structures that barrel along at full speed–at full speed they take 14 km to turn around and get up to full speed again.

It’s very hard to get a change in philosophy–for example banks need to rethink their communication strategy, they need to rethink how they engage with customers in a multichannel way, they need to be customer centric in terms of the way that they measure performance in their business, they need to really invest more in the journey–it is very hard to get that ship turned around.

Let’s now focus on these three phases of disruption:

The first phase was the Internet – which provided us with choice and control as consumers. It gave us the ability to bank when we liked and how we liked. Prior to that there was a physicality to banking – we had to physically go down to the branch between 9 to 3, because that was when the bank was open for customers (banking hours, now there’s a term that has become an anachronism).

Internet banking gave us more freedom. In recent times we’ve had some new models come out here in Australia, like uBank. They are now the 8th largest bank in Australia in terms of deposits – they are only 3 years old.

Why have they been successful? Bankers usually answer that it is there good interest rate. However, there has been a 300% increase in Internet bank deposits in the last 18 – 24 months. Online deposits are increasing at twice the rate of deposits in the offline world. What has made uBank successful is not their interest rate, but behavior.

Behavior of customers are changing and this is the influence, this is what’s driving changes in this business. Our expectations are also changing.

Social media has given us further control. It’s given us power as consumers. Bank of America has 1900 fans on Facebook. I hate Bank of America has 32,000 fans. A customer put out a video on YouTube calling them out for increasing her credit card interest rate without consulting her and not letting her negotiate on it. Within 3 months she had over 500,000 views. Bank of America had to change their minds.

This has never happened before!

Those big ships are awfully hard to negotiate with when you are standing in their way, but social media has given the consumer that power. Banks are under the eye of the consumer these days – transparency is there. Some folks wonder about trust in these new technologies, but post the GFC trust in banking is at an all time low.

Trust and security are no longer the big issues.

Banks cannot control their customers, they cannot control their brand through spin in social media. The only way they can have any influence on customer perception is by being really good at serving their customers. If banks aren’t, consumers will punish them.

We have a different landscape in terms of brand management for banks today. Who do you think the consumer is more likely to believe – their friends on Facebook, their followers on Twitter or the bank’s full page ad in a local newspaper?

Within banks, legal and compliance are horrified at the thought of responding to a customer in real time. Their first response is to ban social media in the office, thinking it will reduce the risk. However, what they’ve done is just increase the risk exponentially, because unless a bank is willing to speak to customers in their environment then they are speaking about you without you in the discussion. You are exposed a lot more.

The perception that social media is risky is only the case if you are not very good at providing service to your customers.

The second phase of this behavioral shift revolves around mobility. When you first got your Blackberry, I doubt you realised how significant a tool this would be. Suddenly we’re doing 30-40% of our email on it. If I’d told you 15 years ago you’d be doing 30-40% of your email on your Blackberry, you’d have said what is email. Ten years ago your answer would be – what’s a Blackberry. So our behaviors have changed quite rapidly as a result of these new technologies.

And then the iPhone emerged in 2007 and we realised we could have a rich media experience. The screen is big enough for us to have useful content while we are on the move. This was a game changer.

Bank of America launched their iPhone app in Aug 2007. They have over 4m users of this app. Of these, 200,000 are new users who only came to BoA to get access to the app.

The same thing happened when Chase announced their no-deposit cheque service.

You’d think BoA has a really cool app, but it is only rated 1.5 stars on the appstore. All they’ve done is tap into an emerging behavior and insert themselves into the stream to fulfil or enable the behavior.

Why is it that less than 5% of banks in the US have a defined mobile play. Many of the bankers are still saying they are not sure if mobile banking is real, they are not sure which technology to use – iPhone, Android…or wait and see which is the dominant platform.

You have to be able to serve customers from a behavioral perspective. For example HSBC said they had a mobile plan – but it required users to go to a WAP browser typing in an endless string of commands to get access, but their customers didn’t do that, they went to iTunes and typed in ‘HSBC’ and determined they didn’t have an app.

The third disruptive phase is mobile payments. Remote check deposit capture is one innovation in this area. In every western economy checks are in decline. Our use of these physical financial instruments is reducing because our behavior is changing.

In the UK in 1996 there were 11 million cheques issued every day, increasing to 36 million in 2003. This year it will be between 7-800,000. The UK Payments Council has decided that 2018 is the year cheque settlement will cease. Many bankers in the US will say, “That will never happen here.”

But this is the thing – you cannot stop behavior change.

You might think that as a bank you dominate behavior. But we don’t change behavior as bankers, all we do is adapt to it.

Banker need to think more laterally where banking fits in the value chain.

Have you ever tried to go through the onboarding process for a merchant account with a bank – it is a nightmare. Say you want a credit card POS terminal in your business. You need to do a minimum of $100k, you need contracts from all the card companies as well as the bank. Jack Dorsey, one of the Twitter founders, looked at this and could see the pain. And so he created Square – an adaptor for the iPhone, which plugs in the audio jack and costs US$1. You load a Square app up on your iPhone and you become a merchant – instantly.

Think of it from the customer point of view – it would be pretty hard for a bank to sell them its merchant services when they can just go to Square.

The latest patents for the nextgen iPhone have contactless payment incorporated into the phone, including a biometric strip (assumed to be a fingerprint reader) and a near field communications antenna which is what makes contact with the POS terminal.

Would Apple not essentially become a bank if every iPhone user now had this built in payments method connected to the cash balance in their iTunes account?

To succeed in banking in the future it is going to be about reducing the friction and making it easier for customers in their whole life not just with respect to banking. Banks will need to take banking to them, where they need it.