The Future Model of Banking
Lauren Pollak is the Financial Services Practice Lead at Jump Associates, a strategy and innovation consulting firm.
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TiVo for Your Finances

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The author William Gibson famously observed that "the future is already here – it's just not evenly distributed."  Nowhere is that more true than in retail banking. The future of banking has arrived – and it lies outside the banks.

 The dawn of a new era in financial services has been heralded many times, from the introduction of the credit card to the ATM to online banking. Today, evolving consumer behaviors, new technologies and new business models are changing the rules of the game. We are facing an inflection point in the way that financial services are created, delivered, organized and paid for.

Some of the most compelling new entrants in financial services are actually technology-enabled relationship managers. PEX Card delivers an interface allowing businesses to manage employees' prepaid card spend in real time. Mint.com offers a cross-account status dashboard. Simple provides an intuitive interface for banking from The Bancorp Bank.

These relationship managers represent the future of banking. But unless they change course, the future of banks is at the back end, performing the complex, regulated and more easily commoditized mechanics of moving and storing capital.

Banking will ultimately combine the control of PEX Card, the multiple account capabilities of Mint.com and the elegant interface of Simple. The result? TiVo for your finances: a service that assembles and manages a portfolio of accounts from a single portal. Consumers will get real-time advice for spending, borrowing, saving and investing and even recommendations for credit or savings accounts based on their individual needs. This real-time, technology-enabled service wouldn't replace banks. But it would disintermediate banks' relationships with customers, and relegate them to the role of back-end infrastructure provider.

This disintermediated future is already emerging on several fronts, most notably in the frayed relationship between customers and banks. Despite heavy investment in brand-building, distrust of banks remains stubbornly high. Geography and inertia are sometimes all that stand in the way of further turnover. Traditionally, convenient ATMs and branches provided an incentive to remain brand loyal. And automatic bill payment increased account stickiness. But startups like Dwolla are beginning to carve out chunks of these lucrative transactions. And more day-to-day money management activities are going digital. According to Dan Schulman, group president for enterprise growth at American Express, "customers today define convenience by how easily they can move and manage their money from the comfort of their couch, not by the proximity of a bank branch."

This future isn't just about customer relationships. It's also an evolution of the way people engage with their finances. The bank model assumes that customers sit down for planning sessions with their local branch manager. But this behavior is giving way to a new model. Many of us now manage our finances the way we engage with text messaging and other digital activities: in short bursts of attention at random intervals. Those companies that can provide real-time, succinct, cross-account control and recommendations are best positioned to serve these new behaviors.

These changes in consumer sentiment aren't just a fad. Generation Y, the 20-something beneficiaries of trillions of dollars in imminent intergenerational wealth transfer, has a fundamentally different set of beliefs about money than their parents. Baby Boomers view money as a physical object like a "nest egg." To them, a physical bank location for making deposits or taking out a loan makes perfect sense. After all, you have to get money from somewhere, even if it arrives in the form of an electronic account.

However, to Gen Y, money is not a wad of cash. It's a number assigned to their purchasing power. The very word "deposit" evokes a physicality that's out of step with the electronic transfer of funds that characterizes the way they spend money. Banks don't yet understand that. But technology startups, many of them run by this same cohort, do. And that's giving these firms a distinct edge in the future of banking.

This kind of disintermediation could be a major disruption to banks' current businesses. But that doesn't have to spell disaster. There's a wealth of opportunity, provided that banks think differently about disruption – as something to harness, not just avoid. It can mean tremendous growth: new products, new customers, even new markets. To harness that, banks need to reinvent their relationships, their offerings and their underlying revenue model. We don't need a crystal ball to see that future. The future is already here.

Lauren Pollak is the financial services practice lead at Jump Associates, a strategy and innovation consulting firm. 

 

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Comments (3)
Fascinating article. The author seems to peer into the future. What visionary observations. Hope she writes more.
Posted by Gene L. Osofsky | Thursday, July 18 2013 at 3:33AM ET
Interesting article! One of the concerns I have with folks not understanding money as a physical entity is that they don't have the same fear of it running out and are therefore more likely to go into heavy debt, either intentionally or mistakenly. You talk about real-time recommendations being provided to banking customers. I assume this means advertisements for banking products like loans. Do you foresee that regulations would be needed for such advertising in order to limit predatory lending or abuses of that sort?
Posted by vaquanda@yahoo.com | Friday, July 19 2013 at 12:55PM ET
vaquanda raises a great point. Currently retail banks have no "duty" to their customers to give good financial advice. In fact, the industry wants to continue the "no duty" theme as the ABA and CBA fight against standards of "suitability" and "prudence". More and more articles will be forthcoming as soon as the financial writers understand this. Most bankers that interface with regular customers do not know this. The TRUST issue will continue to a thorn in the eye of bankers because of this. I can easily provide three different financial solutions to the same set of facts depending on whether a standard of duty exists or not. The answers are dramatically different - yet the same bank might give those three solutions depending on the duty requirements of their own personnel such as Registered Investment Advisers, Registered Reps, etc.

Ms. Pollan makes a good point about "short bursts of attention at random intervals. Knowing this, the great retail bank will always provide "good advice" so that when the customer finally has time for a sit down session with a financial professional (not a branch manager), the professional will be able to easily integrate good small decisions into a great overall plan. That professional may be an artificial intelligence highly automated data interface for those with limited assets, while it will be human for the top 30% or so of customers which have most of the wealth.

We must also be aware that, at least in the past, most consumers with money do not believe that banks are a good source of financial advice and tend to not consolidate their wealth with any one vendor.

Posted by frankarauscher | Monday, July 22 2013 at 12:34PM ET
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