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.