Introduction To BANK 3.0
BANK 2.0 was written at the start of a time of great disruption in the banking and financial services space. We were in the midst of a “global financial crisis”, second only to the Great Depression for many commentators. In the midst of this chaos, however, the retail banking space faced an entirely different challenge as the cracks in the façade that was the “secure banking system” appeared.
“Global Central banks have pumped $8.7tn into the banking system to ‘save the world’. Saving the banks has cost more money than it cost to fight WWII, the first Gulf War, put a man on the moon, clean up after last year’s Japanese Tsunami, and the entire African aid budget for the last 20 years all put together.” —David McWilliams, PunkEconomics
This was not just a crisis of identity, a challenge to the perception of banks as “secure” and “socially responsible” bastions of the community. It was a challenge to the very role of banks in an open, transparent society. This was more than just the “occupy” movement and a backlash against unreasonable bonuses—bankers suddenly found themselves having to answer to the public for their decisions that led to the crisis.
Bankers rallied in this environment to claim how unjust negative public opinion was, how they had the right to make a profit (thanks for that gem, Brian Moynihan), how bankers needed to get huge bonuses because otherwise they might leave their employers, and that they were sick of the sledging they were getting from customers who really had no idea how banks or the banking system worked. Now you might think that’s unfair, but those are the comments that stuck with customers in the midst of all this backlash.
The problem, however, was not one solely of perception, but of relevance. In an age where I use my mobile phone and the Internet more than I watch TV, and where bookstores, video rental stores and other mainstays of the physical retail commerce are quickly morphing, banks just appeared old-fashioned and out of touch.
In a world where I’m more likely to text you, update my status, upload a photo or use an app, rather than visit a bank branch—the change that was being thrust on bankers was not just a crisis of identity, forced transparency, and a battle for public opinion, but a crisis of modality. Retail banking was fundamentally ready to change the way it worked at the consumer interface, but the overwhelming tone of the industry was both a rejection of that notion and a dismissal of changing consumer needs at the same time. Bankers dismissed the concept that digital interactions were overtaking the branch, and reinforced the need for faceto- face interactions as superior when all they were really doing was trying to justify their bloated, costly, physical infrastructure.
It was in this environment that a new reality of banking started to emerge. Banking was no longer defined or hemmed in by a physical distribution network, or physical artefacts. The banking system emerging out of the global crisis would be one that was highly utilitarian, pervasive, mobile, and seamlessly engineered to work when and where we needed it. While the “death of cash” will still take many years to become a reality, the effects of the mobile phone and Internet are causing a massive shift in bank practices, distribution models and competitive landscape.
In the end, many of the banks that were household names during the 20th century will simply cease to exist as they are displaced or consolidated in the system-wide disruption that is soon coming. New players are emerging now that are taking ownership of the customer experience through revolutionary new techniques that attack the fringes of “banking” and payments.
PayPal, perhaps the largest financial institution in the world (by number of active customers), flourished by filling a gap in payments experience born out of a lukewarm industry reception to e-commerce, to become easily the dominant online payment provider. Now 12 years old, PayPal is still considered by many banks to be a “new” player in the sector, but for start-ups now disrupting the industry, PayPal is an incumbent.
Square, a company founded by Jack Dorsey of Twitter fame, went from startup to a $4-billion business in revenue in just under two years, showing banks first that a point-of-sale terminal wasn’t necessary, and then that even cards weren’t necessary.
Simple (formerly BankSimple) emerged as one of the first non-bank entities that truly attacked the very front end of banking. Others quickly followed. The success of these start-ups is not yet certain, but with more than 100,000 registered customers when Simple opened its doors, so to speak, success would appear a simple matter of execution.
In the midst of all of this, a new class of consumer emerged in developed economies such as the US. This new class of consumer no longer needed a bank account to live and work in the system. In fact, millions of them abandoned their traditional bank relationships in favour of prepaid debit cards, PayPal accounts, mobile payments, and other such workarounds to a system that was coming apart at the seams. With $200 billion in prepaid debit cards in the US alone in 2011, this was not a minor blip, this signalled a fundamental change—the rise of the “de-banked”.
It has become clear that Bill Gates’ quote of old about us needing banking, but not banks, has never been more likely an outcome of the technology and behavioural-led disruption we find ourselves in today.
In this revised edition, Bank 3.0, the message I want you to take away is this: Banking is no longer somewhere you go, it’s something you do.
By this new measure, a customer’s assessment of a service provider in the retail banking or financial services space will not be capital adequacy, branch network, products or rates. It will be how simply and easily customers can access banking when they need it, and how much they trust the partner or service provider to execute.
So if you’re a bank—what are you going to do? How are you going to make the transition? When will you need to start scaling back branches? How real is this shift and how quickly will it happen?
While Bank 3.0 retains some of the great case studies and groundwork that was in Bank 2.0, I’ve tried to update this based on the rapidly changing environment we’ve found ourselves in over the last few years. It’s incredible how much has changed and what this means for the future of banking, and, as such, I felt these changes added tremendous value to the discussion. Much of the original content is gone, making way for a more relevant and up-to-date discussion.
For those of you who previously read Bank 2.0, this is an update that includes insight on the acceleration of mobile deployments, including detailed discussion on wallets and cardless solutions. We’ll look at the differences between technologies such as NFC and Virtual Wallets, and what is the likely outcome for payments over the next decade, including how long before plastic cards are really on the decline. We’ll look at what is happening in the web space as a result of our moving away from the PC browser to “screens”, along with the death of Adobe Flash and the emergence of HTML 5. We’re taking a much more detailed look at the implications of social media on your brand, how you engage customers and how this impacts organisation structure. We’ll look into the emergence of journeys at the point of impact, and we’ll look at the need for ever more pervasive banking solutions enabled through smart data and collaboration across disciplines and industries (e.g. mobile network operators and institutions.)
Be assured this is disruptive and controversial. This is about as exciting as banking gets. Everything from this point on is changing. What you used to consider as banking historically is about to get, not just a makeover, but a complete reboot.
If you’re in retail banking, the future starts now and it’s called BANK 3.0. Jump in, or get disrupted.
To understand the core psychological drivers at work in the modern, hyperconnected consumer, we need to revisit one of the foundational pieces of work in respect of the theory of motivation—that of Maslow’s hierarchy of needs. Abraham Maslow studied exemplary people of his era such as Albert Einstein, Jane Addams, Eleanor Roosevelt, and Frederick Douglass, and determined the hierarchical progression of the individual—essentially what amounts to a theory of positive motivation and personal development.
Figure 1.1: Maslow’s hierarchy of needs (c. 1943)
(Credit: Wikipedia Creative Commons)
The growth of technology and more efficient service paths and ways to meet our self-actualisation needs have shifted the way we value our time, set expectations and perceive ourselves in our environment. For example, we understand through the introduction of new communications channels that if we can do something via phone or online, we are essentially wasting our time by persisting with a traditional interaction that is far less time-efficient. This, in turn, increases our self-esteem because we are using our time more wisely. Secondly, the execution of a transaction or a purchase without the assistance of a person, as long as it works well, gives us a feeling of control and self-achievement that cannot be achieved in a traditional interaction. Let me illustrate…
Take a mortgage proposition from the 1970s in middle America. Let’s say I wanted to purchase a family home, but needed a mortgage from the bank to accomplish that. In those days, I would need to drive down to the local bank, make an appointment with the manager, and then prepare myself for an intense grovelling session to see if I could possibly convince the bank manager to give me his approval. If the bank manager liked me, or knew my family, or my business was strategic to the bank, then I might get an offer, but I had zero control of rates, fees and such, as the bank was totally in control. This might have led me as a customer to feel helpless, especially if the application was rejected.
Banks at the time began to believe it was ok to reject their customers and effectively started saying to them: “If you’re lucky, if we approve your application, we might just let you be our customer.” These days, the customer has much greater control over this type of interaction and is not dependent on a limited set of providers, and so he is empowered.