Smart Banks and Dumb Pipes

The recent dynamics introduced in the banking industry by the emergence of financial technology or Fintech players reminds me of the disruptions seen in the telecom industry starting in the late 1990s. It seems to me that the banking industry now has some lessons and opportunities that they can cash in on, if they pay attention to the lessons from the past.

 

  The Telecom Industry

Remember how the telecom industry in the 1990s faced a new breed of competitors, the over-the-top-providers (OTTPs)?  The debate then was whether the telecom industry would transform itself to provide smart pipes or just provide dumb pipes. At the time, the world wondered if telecom players would be open to collaborating with these new competitors or if they would assume that a competitive advantage comes from control and, therefore, a closed system?  Would their customer retention strategy be through offering exciting services or merely through contracts?  Would they learn from these upstarts and use that knowledge – and their financial resources – to change the system for their own gain?

 

We all know the state of the telecom industry.

 

Even after more than a couple of decades, the industry continues to be plagued by displacement of its traditional businesses and by declining revenues.  Of late, these declines have even been felt in the wireless segment.  Consolidation continues and infrastructure investments keep increasing due to OTTPs’ bandwidth-hogging applications and services. In addition to all of that, consumers’ expectation of service quality remains five nines when it comes to service providers, while OTTPs get a virtual shrug from consumers when their apps get cranky.

 

Let’s jump for a moment from the telecom kerfuffle to where the banking industry is today.

 

Today’s Banking Industry                                                                                                     

 

In the last few years, a new crop of FinTech firms is gaining in prominence with consumers:  companies like Intuit and Quicken allow consumers to manage their finances better, companies like Betterment and Wealthfront enable consumers to make smarter investment choices, and data aggregators such as Plaid and Yodlee (Envestment) act as a conduit between consumer’s financial data and companies that enable consumers to manage their finances.

“The possibilities are numerous once you have access to customers’ financial data.  You can make ambitious, big-picture choices based on reliable, strong information.”

So now imagine the possibilities that bloom for these FinTechs once they have access to consumer’s financial data and financial transactions.  Here are three examples of what that can look like.

 

  • FinTechs having access to a consumer’s financial obligations such as home loans and credit card debts, can connect them with lenders or card issuers offering better interest rates. (Implication: customer retention becomes a problem for banks.)

 

  • FinTechs, understanding a consumer’s savings pattern and cash-on-hand, can provide advice on better investment choices and savings schemes with higher yields. (Implication: loss of customers for a bank or financial institution.)

 

  • Data aggregator FinTechs can use their platform for personalized advertising based on a consumer’s consumption patterns, thus deepening the bond with the consumer. (Implication: in the era where banks are trying to understand their customers’ better and offer products and services that match their preferences beyond their core, the data aggregator can more easily provide access to these products and services since their platforms lend themselves to onboard partners).

 

All the above examples illustrate how the relationships between a traditional bank and its customers could be transformed due to the emergence of FinTechs. Traditional banks need to rethink their customer relationship, customer retention, and customer experience strategies so that they may compete effectively amidst the changing banking landscape.

 

What do financial institutions in the US think of the FinTechs having access to their customer information?  JP Morgan Chase and Wells Fargo have been more outspoken, expressing concerns about the security of their customers’ financial information, which is well founded.  But they also realize the potential of losing their customers if they don’t offer similar services.  To combat the competitive challenges, each of them has signed agreements with Intuit and Xero, respectively, that provide these companies access to their customers’ financial information using APIs (application programming interfaces) with the condition that they will not sell their customer’s data to third parties.

 

Meanwhile, What Are the Europeans Doing?

In Europe, the situation is different.  The general belief of European banks is that the digital footprint of the consumer is owned by the consumer, not the bank. This is aided by the European Commission’s Directive on Payment Services (PSD2) that not only addresses online and mobile payments but also contains provisions that enables third parties to access the banks’ customer financial information through APIs.

 

In response to this directive, here are some specific examples about how some European banks are reacting:

 

  • The Spanish Bank BBVA recently announced that it is opening up access to customer data so that other companies can use the information to offer bespoke financial services.
  • The French Bank Credit Agricole launched its app store in 2012, and then stated publicly that data the customer creates in relationship with the bank, or any partner, is the customer’s own property, so they should have access to it through the apps that are useful to them.
  • The German Fidor Bank went a step further when it announced its API developer community.

 

Obviously, another piece of this success pie is knowing how to use all of this consumer information so that a bank can anticipate consumer expectations and keep its status as an innovative success machine.

 

“If established industries can’t stay in these new games, they will go the way of rotary dial telephones.”

 

Is History Repeating Itself?

I see a pattern here.  The banking industry today is facing the same issues that the telecom industry did in the 90s.  How can they play well with the new smart kids while keeping their popularity on the playground?  Disruptors like Uber and Airbnb will continue to change the game.  If established industries can’t stay in these new games, they will go the way of rotary dial telephones.

 

I hope to see US banks accepting these changes and finding ways to ensure security while providing a wide range of customer services.  Disruptors will continue to push the boundaries of what customers don’t even know they want, creating customer demands that force new technologies that improve bandwidth, enhance globalization, and reboot everyday life.

 

“You have to be obsessed with your customer—that’s the strategy that works.” 

 

New start-up companies continue to emerge and then sit on top of the infrastructure of the telecom service providers.  But it’s those new companies that have been successful in cultivating strong customer loyalty. So you tell me.  Am I wrong?  Will we see a repeat of the telecom industry, i.e. will financial institutions essentially become ‘dumb data pipes,’ with FinTechs using the data and services of these banks as a platform to engage with consumers (and profiting from their traffic)?  How will the US banking industry respond? Will the US banks try and maintain control of their customers through closed systems like the telecom industry in the 1990s and 2000s?  Or will they focus on delivering superior customer experiences even if that means collaborating with the new disruptors?

 

Delivering superior customer experiences will require obsessing about the customers’ wants before they ask for it.  And this obsession is what will drive the right decisions within any enterprise, including the banks in the US.