Social networking Web sites will affect banks more than you think. Social banking, an emerging banking distribution model, has the potential to displace banks from the center of customers' financial services relationships. The growth of social networking and the emergence of social-banking models will drive fundamental change in the ways that consumers manage their financial lives.

There are two equally important aspects to social banking. First would be personal financial management sites, such as Geezeo, Mint and Wesabe, which allow consumers to aggregate their personal financial or investment account data, analyze it for spending and budgeting trends, discuss budgeting and financial management concerns with other consumers and financial institutions, and create and read peer and independent professionals' reviews on financial products or services.

The other aspect is the transmission and storage of funds within the social networking communities — peer-to-peer lending and saving. This type of social banking moves away from the simple sharing of data and information in the social-networking environment, and focuses on facilitating the flow of funds and deposits between social groups by delivering peer-to-peer loans and savings products through new peer-to-peer Web sites.

These sites have been established in many countries. Here in the U.S., there are such sites as Prosper, Lending Club and newly formed Virgin Money USA, the social lending organization formerly known as CircleLending. Peer-to-peer-based social banking unites the social needs and requirements of differing participants to deliver a self-sustaining model, linking supply directly with demand.

Social banking is driven by the desire of many bank customers to feel more connected with their trading partners by re-establishing the often-missing link between lenders and borrowers. This link can initially be established through social groups sharing data and information about their financial services products and services.

By re-establishing this link, social-banking sites leverage peer-to-peer connections to reignite the relationship aspect of banking and to tap into the desire of customers to know what happens to their deposits.

The potential benefits for banks to adopt this new distribution model are compelling. Social banking is consumer-focused and it creates the opportunity for consumers to have complex, dynamic relationships with their banks, and others involved in all aspects of the borrowing/lending supply chain.

The traditional lines between depositors and borrowers blur as they participate in social networks and gain more information about the other. For example, a U.S. consumer can be part of a financial social network and lend funds to another American consumer, transfer funds from her Bank of America savings account to invest via Schwab Charitable in microfinance guarantees in Southeast Asia, and compare ways to cut spending on transportation with other consumers on Mint.

Banks must create a social media strategy before deciding to evolve toward a social banking model. Opportunities to create partnerships with social banking providers should be evaluated — don't plan to build your own social networks. Identify thriving social networks, whether they are financial social networks or personal financial social networks. Some of these networks are already emerging as new retail banking vendors — for example, SmartyPig, Wesabe and iThryv.

Banks should also plan to make their pricing and services more transparent within the organization and use this transparency to enable customers to compare the bank's prices with that of competitors and to expose pricing strategies to customers in ways that reward loyalty and encourage multiple account holdings.

The social banking model is not here today and probably won't exist within the next year.

The essential task for banks today is to lay the groundwork by creating the partnerships, tools and IT infrastructure needed to monitor changes in the business environment, develop social banking strategies and pursue opportunities that will allow implementation of this emerging model.

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