Everyone knows it’s broken

One of the biggest frustrations innovators face is that of trying to change things that are obviously outdated or flawed, but for which the organization seems unwilling to alter its product, market, or delivery strategy.

Modern retail banks make money from re-investing the money you store with them at a higher rate. But increasingly, they also make money off fees. From annual credit card fees, to issuing new checks, to charging you per transaction, today’s banking is often about extracting money from customers.

At the same time, banking is about convenience. Eight short years ago, smartphones weren’t really prevalent. Today, everyone is walking around with a tricorder in their pocket. Well, not everyone, but one in five humans—so for most banks, everyone.

With this tricorder and an app my bank has thoughtfully created for me, I can do things to my money myself, from checking balances anywhere to moving funds from one account to another.

This, however, has created a ticking time bomb in the heart of retail banking. It’s exposed the tension between a fee-based structure and consumer convenience. Everyone knows this is the case. Tellers and branch managers with whom I’ve discussed it tell me so; consumers tell me so; even executives at banks acknowledge it. But producing change is much, much harder.

I’ll pick on my bank, CIBC, for two examples.

Example 1: Bank fees

The other day, I went to the bank to withdraw money from my savings account.

“There will be a $5 charge for that,” said the teller helpfully.

“Hang on a minute,” I replied. I drew my phone from my pocket, opened up the banking app, and transferred the money from savings to checking.

CIBC-transfer“Okay,” I said. “Please take it from the checking account.”

And there was no fee.

This exchange helped nobody. This kind of bank fee is little more than a late adopter tax. It preys on those unaware that their bank has an app, or confused by Byzantine fee structures.

Example two: monthly statements

Now consider another tradition of the banking industry—the monthly statement. Each month, CIBC prints and mails me a physical copy of my transactions, which I dutifully file. A couple of years ago, there was much fanfare around their introduction of electronic monthly statements, and the bank spent millions trying to convince customers to abandon paper.

Unfortunately, monthly electronic statements are incrementalism of the worst kind. The very idea of a monthly statement is a leftover from an era when big mainframes in the basement chewed on transactions, spitting out a batch of physical records at regular intervals. Monthly statements make no sense when I have constant access to my bank balance through my phone.

Modern bank customers don’t know it yet, but what they want isn’t digital versions of monthly statements. They want their banking history, in escrow, stored by a third party where it acts as inarguable proof. And they want access to realtime banking information, with a smart agent notifying them of unusual or important things happening to their money.

Ignoring the onslaught

Banks can see this coming. The writing is on the wall:

  • There are 1.6 Billion Facebook users—and Chris Gayomali makes a great case that the real reason the company is pushing its Messenger app so aggressively is to introduce person-to-person payments. Goodbye money transfers, and maybe even Western Union.
  • The psychographics of younger customers, weaned on Paypal and Whatsapp, is entirely foreign to them. Consider how Millennials think about mobile payment app Venmo—which, among other things, turns your payment memo into a status update for your friends, a kind of social proof of a transaction.
  • Bitcoin, blockchain, and sidechain communication give money an opinion about how, when, and where it will be used. Money is code. Contracts are inseparable from the value they represent, and terms and conditions can be communicated, inherited, and enforced. Smart money makes today’s currency look downright flawed.
  • Even if you set aside the rise of cryptocurrency, there are many multi-Billion-dollar micropayment companies weaned on adult content and gambling that are now looking to go legitimate. And companies like Square and Stripe disrupting point-of-sale retail.
  • Apple’s payment tools loom large. Not just because every device comes with an iTunes account, but also because now every physical device is a multi-factor authentication tool you carry everywhere. Google Wallet won’t be far behind. Phones have nearfield payment, fingerprint detection, location awareness. But more importantly, they have realtime communication, allowing transaction confirmation to happen in front of your eyes.
  • Foundation Capital’s Charles Moldow says microlending and re-tooling the way we borrow and share money is a Trillion dollar opportunity hiding in plain sight. He’s probably being conservative.

If you’re a bank, none of this is news to you. It’s an existential threat that’s been coming for decades. And yet, you can’t change. Your entire organization is built around fee structures, physical offices, monthly interactions. Your only alternative is to start from scratch with a parallel, competing banking model, which would immediately cannibalize your existing business.

Part of the problem is regulation. Banks have people’s money, and for this, they need to be insured. Insurance requires predictability, and that means structure and risk avoidance. So the nature of banking regulation makes innovation difficult.

Another factor is the inability to fail. When Paypal was rolling out its offering, the company wasn’t certified in most U.S. states. Neither was Visa, which had aspirations for its own web payment system. But where Visa had to wait to be compliant throughout North America, Paypal could forge ahead: small companies with nothing to lose can ask for forgiveness instead of waiting for permission.

It’s a tough problem, and banks can’t easily innovate, but innovate they must if they hope to survive. The future of money is just fine. The future of banking, on the other hand, dangles by a thread.

7 thoughts on “Everyone knows it’s broken

  1. Yes! This is precisely why I have switched my primary banking to Simple, and rely on Square Cash for money transfers rather than dealing with Bank-to-Bank fees and delays. I don’t even own a checkbook, but because my landlord has no online payment portal, I pay the $0.60 for a Western Union money order every time I pay rent.

  2. Great post and agree that much of retail banking is broken and that it is a function of both regulation and corporate agility (or the lack thereof). Statements really are useless when you can access your data and pivot / sort / review on a variety of dimensions. However, the regs in Canada force financial institutions to issue a standardized statement on a monthly basis, either in electronic or paper format. Yes, the banks should be lobbying hard for regulatory reform, but sadly this takes time and significant effort. The good news is that there are banks out there that get ‘Digital’. It’s true. Do a little digging and you’ll find some interesting strategy and digital development by banks (note – they’re not Canadian). Case in point, the use of big data to identify repeat transactions that don’t fit a consumer’s normal credit card spending pattern and then providing a notice to that consumer. Pretty tactical, but part of a larger digital strategy that is customer-back.

    Another big regulatory hurdle, and one that many of the smaller more agile financial service providers may struggle with (when asking for forgiveness) is anti-money laundering compliance. The bar is set pretty high, and rightfully so, to confirm the identity of an individual. This is easy to do in a ‘bricks & mortar’ banking structure, but in an increasingly electronic world the process isn’t so easy. Simplify that process without increasing risk and lending and payment opportunities open up massively! Ignore the rules or do a weak job of complying with it and agile start-ups, just like big banks, will be on the wrong side of massive fines, consent orders and a media circus.

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