Ten years ago the consultants said to us that we had to scrap our branches and go straight to the internet, but I had heard those kinds of statements before with the credit cards and ATMs…I’m old enough to remember.”
Alfredo Sáenz, CEO Santander (The Economist, May 19th, 2012)

I think that this sort of comment is effectively hiding your head in the sand, ignoring the signs. Thus, I thought I’d share a statistical view of the triggers that result in the deconstruction of traditional distribution systems, and look at the evidence we can already see in the retail banking space to give some specific metrics around which branches need to go and when. This is hard data demonstrated in a way that reinforces that banking is no different to any other business facing changing consumer behavior. If you still believe branches will survive en masse, you need to at least read this for your own peace of mind.

One other warning. This is a lengthy, detailed post for obvious reasons…

Core behavioral shift

The argument at the core of anticipating widespread disruption to the physical distribution channel within retail banking is to examine changing behavior around the branch, and if there are any patterns we can learn from in other industries. In industries like music, books, video rental, and others we see historically the same triggers and shifts, along with the same reluctance to accept the inevitable changes that this brings. In each industry we’ve seen majors like Tower Records, Borders, and Blockbuster (see Wikipedia’s List of Defunct Retailers of the United States to see the full effect of disruption in distribution) faced with the same core shift, and an inability or unwillingness to change their distribution model to match changing consumer behaviors. In the retail banking market, we’re seeing the same reluctance to believe that anything will be fundamentally different with passionate arguments that the ‘branch will survive’. What is typically at the core of this imperative for change?

In each disrupted business or industry we see a paradigm shift in distribution initiated by a technological breakthrough that changes buying habits. These paradigm shifts are sometime convergent as in the case of the iPod and iTunes, but correlate with a core product model such as the shift from buying entire Albums, to just buying (or downloading) Singles. In the case of books the core buying behavior is characterized as eBook versus Hardcover or Paperback, but the eBook wasn’t really a serious competitor in the buying behavior stakes until Amazon launched the Kindle ‘eBook reader’.

At the core is an emerging behavior that demonstrates a trade-off between buying convenience and the need to ‘touch and feel’ the brand or product in-store. Often the new product provides a substantial price benefit because of lower distribution costs also, but not always. Great new product mechanisms show that convenience and ease of use will often even trump pricing disadvantages (such as in the case of a booking fee for cinema tickets).

In each instance of buying behavior shift we see early adopters first out of the gate on the new technologies that allow different buying or consumption, we then see both traditional consumers and retailers voice extreme skepticism around the import of this new emerging behavior, and finally we see rapid adoption of the technology over 3-5 years resulting in a irreversible upheaval of traditional distribution systems. This cycle of adoption and industry realization might be likened to the Kübler-Ross model, commonly known as the “Five Stages of Grief”, the only difference being that by the time the industry at large accepts the core consumer behavior shift a few major brand names have usually, already gone the way of the Dodo.

Those that have gone before us

The cycle of disruption can be articulated in the following simple manner. We start with Physical Products in a Physical Store supporting the traditional distribution structure. A new distribution platform (such as the Internet) comes along and changes early adopter buying behavior – we still buy a Physical Product but it comes through a Digital Store. Finally, the product (where possible), is abstracted to a digital form (Digital Product) which is Digitally Distributed without the need for the traditional stores.

Physical Product-Physical Store -> Physical Product-Digital Store -> Digital Product - Destroys Physical Distribution

To support this process we need both changing consumer behavior, and the paradigm shift of an emergent digital product. While Amazon has disrupted book sales massively through the Kindle, they can’t affect the same rapid level of disruption on clothes, shoes and electronic goods because those products can’t be fully digitized. When you digitize the product, it eliminates the majority of physical stores required for distribution over time because consumer behavior shifts away from visiting the physical store as the primary buying behavior. Whereas, when a physical product is retained, there is more of a split along buying preferences (e.g. in-store versus digital store) and the same shift takes longer or levels out.

The Typical Pattern of "Store" Disruption

The other interesting side effect of the disruption cycle is that in industries where the physical distribution layer is destroyed, incumbents rarely survive as the dominant distribution players. Look at books where the likes of Borders and Angus & Robertson failed in the last two years, Barnes & Noble still struggles to survive and Amazon absolutely dominates hardcover, paperback and eBook sales across the United States (and to some extent globally). Amazon is now the largest distribution player in book sales bar none – because they owned the new emerging distribution platform, i.e. the digital book and reader combined with the digital bookstore.

Continued on Page 2….

This has led to massive increases in social media use over mobile. WeiXin, a new Social Mobile Network powered by TenCent in China, took 14 months to reach 100 million users, and just 6 more months to reach 200 million. Snapchat, based in the US is sending 60 million mobile-initiated photos per day, or 5 billion snaps in little over a year. Facebook’s own mobile efforts have borne real fruit with a 40% increase in revenue largely attributed to mobile advertising improvements.

Google Plus is enjoying significant growth, overtaking Twitter for the coveted title of the #2 social network on the plant. Don’t count Twitter out just yet though. This year Twitter has broken some of it’s own records as well including the highest number of retweets (3.5m in 24 hours, across 200 countries) for @BarackObama’s “Four More Years” tweet

Four More Tweets? The biggest tweet of 2012

As social media continues to embed itself in modern society, we have many traditional businesses and brands still scratching their heads trying to make sense of it all. Where’s the ROI, what’s the business case for investing in Social Media? Apart from the likes of Facebook, is anyone actually going to be able to make money out of this? Isn’t it ironic that it wasn’t that long ago that we were asking the same things about the Internet.

Recently when Facebook faltered post-IPO, there were no doubt some whom felt justified in their skepticism. But Facebook is still here, as are LinkedIn, Twitter, Google Plus and others. It sounds awfully similar to the post-dotcom boom period, when many who had held off investing in web or had failed to understand the permanent nature and fundamental impact of the Internet, perhaps felt justified in claiming that some sensibility had returned from the overzealous market reception of this new technology. In the end, though, the biggest growth companies of the last decade, even after the so-called dotcom collapse, were all companies married to the Internet.

We’re seeing some very familiar patterns with Social Media here, and it leads me to speculate that it’s only just the very beginning of a fundamental new way of doing business.

Haven’t we seen this movie before?

When radio first became popular in the early 1900’s there were fears from many that it would be extremely destructive to society. These fears included the likes of the fear that families would sit around listening to entertainment programs, wasting hours upon hours, when they could be sitting around the table studying scripture, having sing-alongs around the piano or simply talking. The success of radio hinged on news, story-telling, the ability to create dramas and comedies that would capture the imagination of listeners, along with some factual, up-to-the minute news delivered as it happened, instead of having to wait for the morning’s broadsheet to report. There was the occasional sporting event thrown in also. The first organizations to make money off this new medium were the owners of the radio stations and the content producers, the second were those that produced advertising and conduct marketing activities via the ‘wireless’, and finally businesses who tapped into this new phenomenon to create market reach.

The radio was perceived by some as a threat to society

When TV appeared en-masse in the late 50’s, the same concerns surfaced again. TV would be a great time waster, would produce a decline in morals, and would disrupt families from the wholesome activity of sitting around listening to the wireless. Radio certainly didn’t disappear as a result of TV, but certainly the kaleidoscope of content and sharing, advertising and marketing, programming and story telling became richer and more complex. On top of this new technology were first the ‘networks’ the emerging giants of TV programming – ABC, CNN, NBC, BBC and the like – and advertising firms who knew just how to turn the emotion of a 30-second story into a product endorsement or sales pitch. For decades businesses who could afford to advertise on this medium, were able to generate significant results and revenue through brand awareness.

Internet proved the pattern once again, but the difference in the web was it allowed two-way interaction, something not possible via earlier mediums. This allowed the web to move from a story-telling and advertising medium, to a business platform where transactions in real-time could take place. The first players on this new layer of technology – believed that owning the network and content distribution over that network was where real value lay. The ISPs (Internet Service Providers), the advertisers once again, but now the equivalents of the NBCs, the CNNs players like AOL and Yahoo. Very soon we realized it wasn’t about content, but about platform. The web was a technology that allowed not only advertising and brochureware, but also e-commerce. The Internet’s most disruptive characteristic was the challenge to existing distribution mechanisms and businesses. It would eventually result in the demise of long-established brands in publishing, music and retail, the disintermediation of travel agents, brokers, and dealers, and the creation of new giants like Amazon.

Network, content, advertising, then real revenue

Social Media is following the same pattern. The initial ‘land grab’ was all about the network. Then advertisers flocked to shove more messages down the new pipe to consumers. However, the really interesting developments are the new ways of doing business that will emerge on top of this layer. New businesses that will be disruptive to traditional businesses based on physical/geographical communities instead of the better aligned virtual communities centered on interests and behaviors. New businesses that will eliminate classical market segmentation and demographics, by generating rapid affinity within social groups that don’t fit traditional marketing classification.

On top of Social Media has come a plethora of “Apps”, marketing initiatives, communities and the like. Instagram, Foursquare, Pinterest, Vine, Cinemagram and many others have been designed on top of Facebook’s capability to provide a common user platform, but also allowing for rapid sharing and adoption through the social network in the form of posts, links back to the App, etc. If a friend posts an Instagram Photo, it shows up on Instagram, but also invariably on Facebook as someone shares their pics, and when your friend clicks on your pic they are then invited to try Instagram for themselves. Instagram, Foursquare and others maintain their own ‘network’, but you always tend to find new friends from Facebook or Twitter to build your network within the App’s ecosystem.

The biggest challenge for these businesses is finding revenue models as they evolve. Many of the same challenges occurred for businesses starting out on top of the Internet layer. Business like “Pets.com” and “Webvan.com” found this out as revenue didn’t come quickly enough to save their businesses. We’ll have a few fits and starts on the social business layer also, but those that emerge triumphant will not necessarily be the network owners (Facebook, G+, Twitter), but businesses that marry community, collaboration and the reach of social in entirely new ways. As before with the web, these businesses will disrupt traditional players massively, and emerge as some of the new giants of the next decade.

Some interesting examples of entirely new businesses that are emerging on top of the social layer are business like Kickstarter, Peer-to-Peer lending, AirBNB, Yelp, Uber and others. Business that thrive on community and work by using social as the glue to commerce, creating value through the community, but monetizing it in unique ways also.

Not sure where the ROI is coming on social? By the time you wait to see others find it, it may already be too late for your business. Social is here to stay, and it’s just getting started.

Firstly, let me just say that seeing the likes of GoBank enter the market is great news for consumers and once again proves the viability of the evolved category-killer bank. While GoBank has chosen to use their recently acquired banking license (see http://labusinessjournal.com/news/2011/dec/09/green-dot-completes-bank-acquisition/), their GreenDot prepaid product was originally launched in the “Program Manager” style they referenced in their press release yesterday. However, the back-office model that GreenDot uses to support their GoBank roll-out is not as critical as the distribution strategy of de-linking checking accounts from day-to-day banking accounts. While GreenDot’s stock is down 8% today (at the time of print - http://investing.money.msn.com/investments/stock-price?symbol=US:GDOT&) I believe that ultimately this strategy will pay off in spades for GreenDot.

This non-checking, debit account strategy is the same approach that Simple pioneered, and the same model as our friends at and Bluebird deploy. It bodes well for the new category of ‘bank account’ that is highly utilitarian and not fully-loaded without outdated checking costs or overdraft fees. A bank you can use day-to-day. For those that read my blog regularly you’ll know that I’ve been discussing this fundamental shift in distribution strategy for some time and whether you call it a “Near Bank” (as Dave Birch does) or a NeoChecking account as Ron Shevlin does, this marks a fundamental re-classification of the basic bank account. An account that is classified not by it’s underlying product structure, but by it’s utility.

That’s why at Movenbank we’re going even further. We believe the basic bank account of the future will not only not have checks (or cheques), but it will reside on your phone which operates as your primary payment device. Thus it will also not have plastic. I’m sure GreenDot/GoBank, Simple and Bluebird will come to the same conclusion and optimize their experience for mobile payments and feedback in the future, but for now that distinction of the mobile-first bank account hopefully will remain with Movenbank for some years.

So let’s get to those two predictions:

1. The last personal check in the US will be written sometime in 2018

2. Sometime in the next 24-48 months a stock analyst will downgrade a major bank stock for use of checking accounts and excess branch capacity

Here’s my logic.

US Check Decline is readily predictable

According to the Federal Reserve Bank (US) in 2000 16.9 Billion commercial checks were written annually. By 2010 that had reduced by an incredible 55% to just 7.7Bn checks annually. However, the early impact of P2P payments and mobile has already seen a further 33% reduction in check use down to a estimated 5.1Bn by the close of 2012. With the decline rapidly increasing in speed from a 9.6% drop in 2009, to a 23.9% drop in 2011, we can expect this only to speed up. On a simple trending basis then, the last commercial check to be written in the United States will be signed in either 2017 or if you are really optimistic in 2018. Unless consumer behavior reverts to 20th century norms and the check comes back into fashion – yeah sure…

Check use in the US is undergoing rapid decline

Thus the checking account is already dead, most banks and CUs just don’t know it already. So positioning a basic account without checks does not only make sense today, it should be your mainstream day-to-day account offering, especially for the Y-Gens coming to your brand.

Stock market analyst shift is inevitable

The biggest measure of a commercial bank stock with a dominant retail play remains both annual revenue, capital and loan book (ability to generate future revenue). What will become clear as the modality and acquisition of the basic bank account shifts (lower paper KYC hurdles, less friction, more online and mobile enablement) is that “account opening” and the ability of cross-sell/up-sell to lead to future revenue will be closely examined. At that point, lower friction engagement models and cheaper distribution strategies will be seen as better growth levers than traditional friction-heavy, branch processes. Any banks carrying excess stock where distribution processes could have already been moved to mobile, tablet or online engagement at much lower costs, will be penalized hard.

I predict that 2014 will be the year we see a financial analyst downgrade a major bank’s rating based on excess branch capacity for this reason.

It’s all connected by changing consumer behavior and engagement.

Whichever way you look at it, 2013 is a hell of a year for bank innovation.

These days, it’s getting harder and harder to be cash only, but fortunately there are multiple options that allow an un(der)banked individual to participate in the global economy without a real bank. Here are a couple examples of thriving alternatives to banks that provide the utility of banking:

Checking/Current Account

Debit Cards and Gift Cards, Western Union Account, Cash, PayPal Account, Prepaid Telephone Account, Apple Store Account, Starbucks Card, etc

The above artifacts all allow a consumer to ‘store’ cash in an account and pay at various merchants without having a traditional bank account. While they may not offer interest on savings, the fact is that most unbanked consumers likely live paycheck to paycheck and aren’t really going to be swayed by interest rates of term deposits or CDs of 1.25%.

Apple has 400m account holders holding an Apple Store or iTunes account, that’s more than the top 3 banks in the world have in retail banking customers. Starbucks, which processes more than 2m transactions every week in the US, took in deposits of $3 Billion on their in-store App-based debit or gift card this year[1]. That puts them ahead of the 6,985 smaller institutions in the US who on average did around $185m in deposits in 2011, and the 440 midsize institutions who averaged $2.6Bn in deposits. Imagine that! A coffee company that is better at taking deposits than 95% of the FDIC insured banks in the US, and they don’t even have a banking license.

$3Bn in deposits, 2m transactions per week - Starbucks 'bank'?

The same is true for M-Pesa in Kenya who has recently started offering interest on savings and micro-lending facilities. M-Pesa grew to 17m customers in just 6 years, almost 50% of the Kenyan population[2]. They do enough money through their mobile-based simple “current account” to represent 25% of Kenya’s GDP[3]. The banks in Kenya can’t even come close to this type of financial inclusion for the unbanked.

This is all before we even start with the close to $500Bn in pre-paid cards that have been deployed in the US and China alone in 2012[4].

Personal Loans and High-Yield Savings

P2P Lenders, Payday Lenders, Retailer Layway/Laybuy and Store Card Schemes

This year P2P Lending has improved it’s viability as a new asset class. Lending Club announced just this last month that they’ve now exceeded $1Bn in total loans and by January they’re expected to be lending at the rate of more than $100m per month. Considering they just passed $500m in loans just back in March, that’s phenomenal recent growth. Lending Club maintains average annual interest rate of 13.34%, compared to 16% average APR on credit cards. Lending Club has produced average total returns of 8.8% on “savings” over the last 21 months of operation. During the same timeframe, the S&P 500 has had 10 negative quarters, and yielded average total returns of 4.1%[5].

P2P propositions in other markets are rapidly growing too. Zopa in the UK has lent over £250m to-date and the total UK P2P industry now is approaching £400m (including the likes of Ratesetter and Funding Circle). But perhaps more interestingly, Zopa’s growth is increasing with growth of 55%+ year on year (YoY) and 90% YoY growth just in the last 2 months. Zopa’s defaults are below 0.8%, which represents best-in-industry performance and are a fraction of the best performing banks in the UK[6].

Payday lending has been hot the last couple of years too with the likes of Wonga in the UK racking up impressive growth. As of June 2012, Wonga had racked up more than 5.2m loans to its customer base[7], and Wonga is expected to exceed $1Bn of revenue in 2013[8].

Considering that the UK lending market has essentially remained flat over the last 5 years (CAGR of 0.2% between 2007-11), and that P2P lending now represents roughly 3% of the UK retail lending market (non-mortgage lending)[9]. That’s nothing to be sneezed at!

Conclusions

In a recent post, Chris Skinner from the Financial Services Club argued strongly (and competently one might add) that many of these new bank-like capabilities sit on top of rails built by the banking industry, and that without those rails, much of this new capability could not get off the ground.

That’s true, but just like many other industries in recent years, disruptive business models based on new technologies like smartphones, social media or simply better, cheaper distribution methods, are replacing elements of traditional banking. A banker might not think of Starbucks or Apple as replacing a checking or current account, and might quite forcibly argue that it’s rubbish to say that these new players are replacing the role of the bank, and rightly so. However, when you look at the unbanked and underbanked consumer market, you can easily see pre-paid cards, P2P lending and other models taking away business that would otherwise have traditionally gone to banks.

Many banks would likewise be happy about this, because serving the un(der)banked is costly with outmoded, cost heavy distribution models. For the likes of Lending Club, Zopa, M-Pesa, Starbucks and others, however, their cost of distribution is fractional compared with the big banks. New distribution models are opening up bank-like services to those that can’t afford to engage with the big banks (who really don’t want ‘those’ customers anyway).

Sounds like a marriage made in heaven if you ask me…

Here’s what we at Movenbank are doing about it…

Click here to view the embedded video.

Customers rarely get advice in a branch

The average customer walks into a branch to get a task completed. Whether that task is cashing a cheque, wiring funds overseas, looking at refinancing on their home or applying for a credit card, that task is generally the purpose and focus of a visit to a branch. When a customer comes in focused on a task, then they are not of the mindset where they are generally willing to hear unsolicited “advice” from the teller or banker, because they want to get in, execute and get out.

Qualitatively when you research customer interactions in-branch and ask customers when the last time they received ‘advice’ in their bank branch, most can’t ever remember receiving any sort of advice in the branch space.

Check out this YouTube video with customer comments to that effect…

Click here to view the embedded video.

This is counter-intuitive for branch bankers who believe that this is what customers are getting in-branch. However, the metrics for the bank officer are to try to upsell or cross-sell a customer who comes in for a basic transactional interaction, they are not to give unsolicited advice to help a customer with their money or financial health. In that respect, customers are very clear about advice that is caged or camouflaged as a cross-sell proposition – to them it’s an attempt at a sale, not advice.

What a banker might call advice – the cross-sell and upsell – is not advice from a customer perspective. True, unsolicited advice that helps the customer without expectation of revenue is very rare in the branch space because there is simply no metric in the system that allows for this.

The advisor no longer benefits from information scarcity

The concept of advice in-branch is predicated on the principle of information scarcity. The branch officer will know something about banking or financial services that a customer won’t – he’s an expert. However, even in the private banking space today, where advisory requires the ability to juggle multiple asset classes, thousands of potential products, the pendulum is swinging toward more informed customers who are challenging the advisor.

Take a scenario where you have a 2nd generation private banking client interested in the energy sector and green energy. The client comes into the bank to meet with their private banker to discuss this emerging industry and look at investment opportunities. They’ve indicated interest in this area for some time and have subsequently spent the last 3-4 weeks researching the field and options, so when they come into the review meeting with the relationship manager, they’re extremely well informed.

This is the way we used to give advice...

The private banker launches into a discussion on a selection of appropriate funds or structured product options across asset classes, which capture the bank-led approach to the field of green technologies and investments. But the client has come up with something left of field. They’ve found that investments in solar silica (the refined quartz product use in the production of solar cells) and geothermal technology is underleveraged and offer significant opportunities.

The private banker has never even heard of solar silica. So he brings in the commodities specialist – who likewise has never heard of solar silica. There is no specific geo-thermal product, but some ETFs that have a slice of geo-thermal investments.

At this stage, the client has become the advisor. While the private banker can help with execution, they are forced to now go and research the options and assist the client with their buying decision, rather than advising them on an asset class or a product.

This type of interaction is increasingly common, and it turns the head on the old advice model. With 5-Exabytes of content created every two days the likelihood that an advisor will have access to information that a client or customer doesn’t have access to today, is increasingly unrealistic.

The best advice is time sensitive

While the concept of advice is a constructive and affirmative one, the biggest question is can you get me the right advice when and where I need it? The concept that advice is best given in the branch, precludes the reality that the most acute needs often present themselves contextually whether in the form of a life goal, a problem, a hurdle, a crisis, or simply a decision.

Let’s look at the core of day-to-day financial decisions. Everyday a consumer is making decisions on what money to spend, what money not to spend, what product or not to purchase, and what money to allocate to my savings. The very concept of advice is that the “bank” should help you make wise financial decisions that contribute to your overall financial health. However, given the dynamics of the retail financial services industry, the last two decades have seen banks flock to credit offerings that offer higher margin, even if that is at the detriment of the customer’s overall financial health.

Call me cynical but bank solutions need to be aligned with and never in opposition to the financial health of our customers. Customers should not be plagued by countless fees, escalating interest and penalties. Nor should representations be made to them that banking services are ‘free’ when the hidden costs are anything but free. This is anything but ‘advice’ based banking.

The pendulum needs to swing back to helping customers and help is best given when and where I need it. Not waiting for that day once or twice a year that I come into a branch to get something done or fixed, and the teller has a sales metric to cross-sell or up-sell me a credit product I can’t really afford. That’s not advice.

This is where PFM is really going to come into its own. Real-time personal financial management is advice at scale, potentially. Help me live my financial life well, everyday. That’s real advice…

In the banking space I’m often confronted with passionate arguments for why face-to-face interactions, why the availability of advice and the psychological comfort of brick-and-mortar spaces still matter. The problem is that those describing these ‘values’ are inevitably Baby Boomers or Gen-X consumers, describing their comfort levels and buying behaviors. There are a number of key trends we can observe today that signify an abandonment of this traditional buying behavior for the next generation of customers.

The psychology of buying is changing

The last 10-15 years has already seen a significant shift in buying behavior as a result of changing distribution models. When the web started to mature and the dot com phenomenon emerged, we saw the first changes in buying behavior around the willingness to buy physical products like software, books and CDs via online stores. Over time this impacted the retail storefront of the book and music industries as less and less people visited physical stores. The argument oft heard, however, was that products like clothes, shoes, electronic goods, etc. still needed a good old storefront interaction. But success of brands like Zappos, Amazon with their broader retail, and the phenomenon of ‘showrooming’ and the influence of mobile in-store is part of a broader behavioral change, a change in buying behavior writ large.

Visual search and curation are rapidly emerging as key platforms for Gen-M consumers

Pinterest, Instagram, Tumblr, and other social networks are all very powerful communication tools for Gen-M. YouTube is their most popular search engine. Their connection to brands is no longer based on a need to touch and feel the product, or to connect face-to-face. Their connection is visceral, but driven by different senses. Generation M have moved from touch and feel, to see and hear as their new connection with brands, and it needs to happen at speed.

Take a Gen-X attending a concert. They go for the experience – to be a part of the event, experience the band live, to be immersed. The Gen-M digital native goes for the experience too, but they’re driven to share photos, video and to extend the experience of the event to their network. Personal connection to the experience is balanced with the need to share and talk about that experience.

The teenage female of the species would gather at the mall in the 80s and 90s to have a retail shopping experience with her friends, the experience wasn’t the purchase alone, but the collaboration, the social connections, the mall experience. They’d find their way as a group in the shopping environment, trends would develop based on what looked cool, what emerged through group consensus. Today that shopping experience is driven collaboratively online through shopping “haul videos”, discussions around back-to-school or spring break fashion and the like. Decisions on fashion choice aren’t driven by that in-mall collaboration or advertising messages, but through online advocacy, connection with the brand via content – not the store.

With 33 million views, YouTube make-up tutorials like this are far more effective than any Magazine Ad or TV Commercial at building advocacy for cosmetics with teenage shoppers, they're more trustworthy too.

It’s why videos like this Lady Gaga Makeup Tutorial has 33 million views. No bank has ever got even a fraction of this type of advocacy-based engagement or traffic via YouTube today.

This is why advocacy of brands is such a critical driving force for this new generation of consumers. This is why they think in pictures, why they video themselves, why they check-in and share photos, why Instagram and Pinterest have grown so fast amongst this group. They want to have a visual connection with the product or brand, and they want to hear about the experience of the brand, whether directly from a friend or from a trusted platform such as their social network.

This is how Gen-M connects.

Advocacy is built through seeing and hearing a brand

So when you think about designing the next generation of banking or retail understand that the buying behavior of your core customers over the next decade is dependent on a connection of seeing and hearing what your brand is all about, not touching and feeling the product or brand in-situ, not getting advice or speaking to an expert. No one is a better expert than their friends in a network who’ve already tried your product out. The old concepts of Product, Place and Promotion don’t work in this space. Campaigns have very limited application, because they don’t trigger advocacy well and I’ll always trust my network over a brand message built by an advertiser.

How are your customers connecting with your brand in the see and hear space? Touching and feeling the product is no longer critical. Funneling customers into the store is no longer the best customer experience. Today it’s all about creating a connection with the brand through a product or service that I can advocate and share.

What did we do before credit and debit card networks? We paid with cash and cheques. This was an asynchronous process that relied purely on you having either cash in your wallet (or your chequebook) and a merchant (we called them store owners back then) who would accept your payment. We might sometimes forget that there was a time when cards were not accepted and the equipment to process a card transaction didn’t exist, or hadn’t been deployed. In the early days the clunky knuckle-busters were the height of technology, but over time the networks started to deploy electronic terminals to reduce fraud rates, and improve clearing times.

It took almost two decades for card payments to become globally ubiquitous, so it might be reasonable to think that a paradigm shift at the POS will take years to become mainstream. Why would you spend money deploying expensive NFC-enabled POS terminals unless consumers were going to use them, right?

In normal circumstances, if there were no competition, this would make good business sense. The problem for the banks and networks is that they think the ‘card’ is defensible – that this product has enough inertia for consumers to not be bothered by the fact that they can’t yet pay with their phone at every POS terminal. In the US, this inertia has not only meant a slow roll out for NFC, but has also seen US merchants slip 7-8 years behind their EU counterparts. In the EU already 75% of cards support the EMV standard, and more than 90% of terminals, whereas in the US only 30% of merchants support EMV. So we hear frequent stories of US travelers in Europe unable to pay for the simplest of purchases or transactions with long outdated card tech. Worse for the US card industry is that the industry is paying 3c of every transaction in preventable fraud right now due to outdated signature and mag-stripe tech.

So you might think that Apple’s NFC snub supports the theory that there’s simply no hurry. Maybe Apple are simply waiting for NFC to become mainstream before they jump in. That’s undoubtedly part of the reason, but I think there’s another explanation, which presents real problems for the incumbents.

Not-for-consumers?
NFC is sometimes referred to by skeptical industry pundits as Not-For-Consumers. But the technology is sound, has been around for more than a decade, and is a logical transition when you are trying to move consumers from a plastic ‘swipe’ to a phone-based ‘tap’.

Let me tell you why I think Apple baulked this time around with NFC. I think there are three main reasons, but has little to do with the consumer adoption angle:

• Firstly, the most obvious. Apple wants maximum utilization of their device and technology, and it’s likely true that they’re waiting for better US-based infrastructure (their home market and one of their largest) to support phone payments at the POS. Apple is not known generally at leading consumers with new technologies, they weren’t the first with an ‘MP3’ player, neither were they the first tablet manufacturer. Apple is known for their impeccable timing with new technologies, along with creating disruptive ecosystems to support those technologies (like iTunes).
• Secondly, they don’t control the ecosystem and they’re not keen on providing tech that banks and card networks make money on, but they don’t. While it is true Apple has such phenomenal market and brand power that they could move the market on this, why move the market so that banks and card networks continue to make interchange fee, and Apple makes nothing beyond the handset sale?
• Lastly, they’ve figured out that they just don’t need to support the existing POS technology to enable payments at all – so the longer banks and networks wait to deploy NFC ready merchant capability, the less likely it is that Apple will go for NFC all together. In fact, the lack of NFC industry adoption means Apple is choosing to pursue support for digital wallet solutions, taking the card and swipe out of payments all together.

Was it a good decision for Apple? That’s highly debatable, although, it isn’t going to hurt iPhone 5 sales. Apple could have re-released the iPhone 3G and called it the iPhone 5 and they probably would have sold 20 million units without blinking.

So does this mean there’s life left in Cards?
Hell no, not a chance. In fact, the lack of NFC roll out is actually creating significant momentum behind a much more serious and disruptive trend. The trend to go cardless and POS-less completely.

While banks and networks have been debating the merits of NFC, and while US merchant acquirers and card issuers have been debating the roll-out of EMV and new POS technologies, there has been a quiet but steadily growing shift towards payment experiences that don’t require a swipe or tap paradigm at all. Pay with Square, PayPal merchant payments, Amazon checkout, closed loop Mobile Apps like Starbucks’ app, or clever applications of back-end payments like Uber, Apple Store (App) and iTunes are rapidly growing in credibility, both at the POS and online through e-Commerce.

The beauty of NFC, for the banking industry, is that the industry could simply have migrated customers from card to phone and all the existing value chain stayed in place. You still needed a bank relationship, they issued you a card number (or Primary Account Number – PAN as it is known in industry speak) and you still went along to a merchant and used you bank generated account (now theoretically on a mobile phone with an NFC chip) to pay a merchant through their POS terminal. It is a simple way to keep the card and swipe paradigm going and it meant that both the issuing banks and the card networks kept getting interchange fee because there was no alternative to their incumbent rails.

The problem for the industry is that right now we’re doing away with the swipe paradigm altogether, primarily because there wasn’t a rapid enough adoption of NFC-enabled payments. We’ve simply circumvented the poor user experience of the swipe card, for a richer user experience on the mobile device.

Why do I say a poor user experience?

We live in a data rich world right now, where we can download books, music, even boarding passes to our phone. We can use our phone to track where our friends and family are, or communicate with them instantly. Our phones can keep track of our fitness levels, and spur us on to new goals of activity. We can use these same devices to find a restaurant, a bargain at a retailer, or just to find directions (that is if you aren’t using Apple Maps…)

Compared with this rich data platform, nuanced user experiences and the amazing capabilities of our smartphones, the humble plastic card is just plain dumb. It can’t tell us anything at all. Even when we use it at the POS, we can only find out if the transaction is approved or declined. When a transaction is declined, we’re none the wiser – we wouldn’t know if it were due to insufficient funds, whether the merchant has screwed up, or whether there is a hold on our card for some other reason. Payments just look dumb, old and out of date.

The driver for reinventing payments is not putting the card into the phone to get rid of the plastic in our wallet – it is about reinventing and leveraging a payment instance married with data. The trouble for the incumbents is that you just don’t need a card, a swipe or even a POS terminal when it gets down to it. A rapid transition to NFC would have saved the swipe-at-a-POS paradigm by allowing for a rich data support envelop around the payment.

With the poor industry adoption of next-gen POS payment tech, consumers and innovators are seeking that user experience without the swipe at all.

Maybe no card is better anyway
If you’ve tried Uber, for example, you would have pre-registered your account online or through an App and then the time comes for your first trip in an Uber car around town. You book a car through the app, and it shows you the driver coming your way via GPS and how far away he is. Then you’re in the car and off to your destination. When you arrive you exit the car and receive a receipt for the trip on your phone via the app. No card, no swipe, a seamless payment and ride experience. It’s the new paradigm of payment – seamless, frictionless, and information rich.

Uber - doesn't need a swipe to offer better payments

Alternately you may have recently walked into Starbucks to order a No-Whip, Skim Soy, Mocha Frappuccino and a bagel (toasted), but at the point of sale you simply pull out your phone scan the App-generated bar code and you’re off. Soon you’ll be able to just say your name via Pay with Square at the Starbucks register and the payment will be processed, just like you can at merchants like Gregory’s Coffee today.

Whether it is Square, PayPal, Uber, Dwolla, Venmo, iTunes, Apple Store, Starbucks, or any other App-enabled digital wallet, we’re finding that we don’t need a swipe.

Now I know what you’re thinking – that we still need a card number, we still need an issuing bank, and we still need the merchant rails, right?

For now, yes.

Conclusions
The problem, however, for banks is that value stores such as Dwolla, Venmo, PayPal, iTunes only require you to pay a fee to the bank every time you top-up your value store account. Then, if you’re using a digital wallet to pay, you avoid interchange at the transaction level.

For solutions like Pay with Square, Apple Store, and Uber, there is obviously ongoing interchange fee for the network, but because the swipe paradigm has been removed, the back-end rails could be replaced with another P2P (peer-to-peer) payment network solution that avoids the Visa and Mastercard rails all together, perhaps through use of the cloud.

In fact, the fastest growing payment class today would simply be classified as peer-to-peer electronic payments. Increasingly merchants and consumers are going to be seeking simply to make a payment and the incentives to pay in real-time directly from one bank account to another. This is becoming the holy-grail in payments. The problem is that ultimately a P2P real-time payment could entirely circumvent the card networks.

So whether you are a bank or a card network – the decision of Apple to avoid NFC probably just killed your chances of keeping the status quo of interchange via the card/swipe paradigm.

The likelihood is that the digital wallet, whether via a smartphone initiated payment or simply built contextually into shopping experiences, has got too much momentum now to save the swipe paradigm. The next step is simply to avoid interchange, the networks and traditional value stores all together. That’s where merchants and start-up want to take this, and they’re all leading with a better user experience than the existing incumbents. It’s all up for grabs now…

 NEW YORK, USA (10^th August 2012) – Brett King, CEO and Founder of Movenbank, and American Banker’s Bank Technology News “Financial Innovator of the Year 2012”, today announced that the mobile-direct financial start-up has completed its initial raising of US$2.41m seed round funding.

Movenbank to date has been self-funded by its founders and they are now joined by the London-based Anthemis Group, Boston-based Raptor Ventures, Kevin Plank, Founder and CEO of Under Armour® and a syndicated group of Singaporean investors in the seed investment round.

Commenting upon the funding Brett King said, “Our investors believe, as we do, that mobile banking and payments have the opportunity to fundamentally change the everyday retail banking model. Not only making the day-to-day banking experience more cost effective and convenient for consumers but also providing them with increased transparency and access to real-time feedback that will help consumers spend, save and live smarter.”

Udayan Goyal, Co-Founder of Anthemis Group commented, “We are hugely excited by our investment in Movenbank. We believe that Brett and his team are at the cutting edge of Finance 2.0 and embody the ethos and philosophy of Anthemis Group to develop user-centric financial services companies for the new millennium. In a world where retail banking is broken, we believe that Movenbank, through innovations such as the CRED ecosystem and their pioneering work in smartphone based payments will fundamentally change the way banking is done. We welcome Movenbank to the Anthemis network and look forward to a long and mutually beneficial partnership.”

Brett said, “The seed round funding will allow Movenbank to further invest in strengthening our already highly motivated team, and in the build-out of CRED – a proprietary financial credibility score using a combination of financial wellness, social media metrics, transactional insight, and feedback loops to provide customers with the ability to understand their day-to-day financial behavior. Already more than 5,000 customers have had their first glimpse of CRED and we’ve launched a site specifically detailing the advantages that CRED offers our customers. The recent site launch includes a fantastic video animation, developed by Hugh McLeod of @gapingvoid fame, that introduces CRED and Movenbank’s philosophy of transparency, great service, straight-forward advice and feedback. Our objective is not just simpler, better banking services, but giving consumers real control over their financial destiny.”

The CRED video animation and details on CRED can be viewed at www.whatiscred.com.

About Movenbank

Movenbank is not your typical bank. Movenbank is working with banking and payments partners, mobile operators, consumer credit groups, social media partners, merchants and many others to help consumers live smarter financial lives. Based in New York City, Movenbank is set to revolutionize the day-to-day financial experience of consumers with its forthcoming launch of the USA’s first mobile-direct retail banking proposition.

For further information, contact:

Geoffrey Bye (Global Enquiries)               Charyn Goldenberg (US Enquiries)
geoff@movenbank.com                                        charyn@movenbank.com
www.movenbank.com                                          Phone: (212) 947-6915

Last year Starbucks processed more than 26 million mobile payments via the Starbucks Card App, which also resulted in more than $820 million being committed or deposited onto Starbucks Cards. No bank in the US, or the world, that I know of can claim to have had nearly $1 billion in deposits made on a mobile-only payments platform. Ironic that the biggest and best in mobile payments today in the US has nothing to do with either the major banks or the card networks isn’t it?

Starbucks has the most successful mobile payment deployment in the US to-date

The 20 million mobile payments made at Starbucks stores in fiscal 2011—plus another six million by December’s end—were fueled by our hugely popular Starbucks Card Apps for the Android™ and iPhone,® once again reflecting our ability to respond to the constantly changing marketplace in ways that strengthen our connections with customers – 2011 Starbucks Annual Report

This alliance has been characterized by the media as variously the approaching death nell for cash, or the acceleration of mobile wallet adoption:

Cash moved one small step nearer to its deathbed with the announcement on Wednesday that Square, the mobile payments start-up, would form a partnership with the Starbucks Coffee Company – NY Times, August 8th, 2012

Mobile payments service provider, Square, got a $25 million investment from Starbucks (SBUX) — valuing the start-up at $3.25 billion — that could mark the beginning of the end of cash – Forbes Tech, August 8th, 2012

Today’s announced partnership between the west coast innovators Square and Starbucks represents a significant milestone in the advancement of mobile payment and digital wallets – Forbes, August 8th, 2012

Others are not so sure…

Starbucks is one of the biggest retailers yet to embrace the “digital wallet,” and tech blogs are gleefully heralding the death of cash. But such pronouncements may be premature. The digital wallet still faces several hurdles, and it starts with the consumer – US News, August 8th, 2012

But my take is a little different…

The issue for the banking industry at large here is that both Starbucks and Square have demonstrated that payments can be made much simpler through the use of mobile, and without any of the fraud issues currently plaguing mag-stripe in particular, but cards in general. Secondly, the question of whether ‘mobile’ payments are mainstream really must be dismissed as a smoke screen for lagging adoption when 25% of Starbucks consumers and 25% of US merchants have flocked to mobile-enabled payments in the last 2 years, and adoption is rapidly increasing.

From a pure usability perspective swiping your credit card on a Square reader is analogous to a typical POS (Point-of-Sale) terminal and as such Square merchants have quickly adapted. Pay with Square is also easy, but relies on you being able to communicate your name as your unique identifier. Square polls your phone to check if you are in the same physical geography as the merchant, and if you are it displays your Square profile photo on the merchant’s register, so that when you give your name the merchant can verify it’s you and process the payment. No swipe or interaction required. The only challenge is that in a noisy Starbucks with 10 people standing in line behind you trying to communicate your name might be a challenge. Using NFC tap to initiate the payment as an alternative, would certainly speed up this process and allow for some user authentication of the payment also.

The real issue for Amex, Visa, Discover and Mastercard right now is that the ‘cardless’ movement is rapidly accelerating and customers are flocking to these new technologies. The issue is not the death of cash – but the death of plastic. In a much simpler, better informed payments interaction, plastic just looks dumb, insecure and outmoded.

Those working hard to disrupt payments are not the incumbents, but new players like Starbucks and Square. Like photos, books, video, music and many other industries that have fallen fowl to disruptive behavioral shift over the last few years, there is always a false sense of security of how secure the incumbents ‘platform’ or market is. This is the case with payments. Many have said that security, regulation and such prevents exactly this sort of disruption in banking. I would argue that once customers are no longer using plastic that your days as a valued provider of a ‘card’ whether physical or digital, is surely numbered.

This is not the end of cash as much as it is the end of three decades of card-based payment behavior. The shift to the phone as the primary payment device has started, and it’s happening much faster than you think.

Long memories

In the 1930s and 40s in the United States after the Great Depression, there was a perception that the destruction of individualism and community banking practices in favour of cookie-cutter branch banking approaches built on efficiency, sales, and transaction banking was a risk to the stability of the banking system. If there were just a few big banks, and there was a broad loss of confidence, then the whole system could fail. This explains why the US has so many institutions (7,334 FDIC-insured institutions as of 8 March  2012) compared with other developed economies (5,404 banks in the entire EU[1]) , as US regulators historically sought to institutionalise community support and make it harder for monopoly approaches. These so-called “foreign systems” of branch banking were labelled  “monopolistic, undemocratic and with tinges of facism” and as “a destroyer of individualism”.^[2]

This lingering psychology of safety in the physical banking place (and density) stem from long memories over epidemic “runs” on the banking system during the Great Depression:

“It is known to be a large bank and, being distant and perhaps consisting of thousands of branches, is less distinctly visualized than the local bank; and so the people are likely to think of it as great and powerful, and able to meet its liabilities. In the second place if the depositors were to initiate a run on a local branch, it would be difficult to spread their psychology and arouse depositors in distant branches.”^[3]

There was a whole post-war generation that grew up with a healthy skepticism of ‘big banks’ and the risk of a run on the bank. With almost 70 years having passed since the Great Depression, however, the banked population as a whole finally started to believe that banks were inherently securely, safe and trustworthy. We were in for a rude shock!

Trust evaporates in the Global Financial Crisis

Since the Global Financial Crisis we’ve learned that banks are just like any other business, if run poorly they can and do fail, and unfortunately there are many banks that made poor business decisions last decade. Many exposed themselves to sub-prime mortgages, CDOs (Collateralized Debt Obligations) and ABS (Asset Backed Securities), others were over leveraged, had poor risk mitigation strategies, or had their own lines of capital too heavily tied to capital markets. Some like Northern Rock were struggling financially long before the financial crisis, and thus were quick to face dire problems when the economy turned south.

The modern day "run on the bank" @NorthernRock (Credit: The Guardian UK)

We also learned that despite a government-backed system of licensing and regulation, that banks aren’t actually part of a social-support mechanism built to help the end consumer – banks are simply corporations with a primary focus on generating profitability for their shareholders. We learned that at a time of great angst in the community over the role and health of the banking system, bank’s support for consumer financing and lending, that there was no overriding moral imperative to bank policy. In fact, they’d be quite happy to take tax payer funds on the premise that it would increase liquidity and allow them to lend back to the end consumer, when none of that happened and they were more likely to invest those funds in generating bank profits and large bonuses for their executives.

As consumers do we trust banks? We might trust that the deposits banks hold are secure, but we’ve seen through the veil and know that banks are not infallible, they’re just corporations hell bent on profits, like all good companies should be. We know they can be mismanaged and fail, and while we might have been ready to support a “bail out” when the financial crisis first hit, we’re now dubious as to whether that was the right strategy.

Regulation and Advertising won’t rebuild trust

The concept that the industry can rebuild trust in banking through a combination of corporate messaging, advertising or reinforcing regulation is somewhat erroneous.

Consumers today have a healthy skepticism and distrust of big banking. As consumers we also have a social dialog structure (social media) that allows us to reinforce our healthy skepticism at mass scale. There’s a group psychology involved, but one that society perceives as a protection, creating transparency. Banks might feel frustrated at this, but the reality is that ‘trust’ in the industry was largely engineered over the last few decades through a combination of advertising and visible regulation, and with the missteps of the crisis quickly evaporated. Now similar attempts to re-engineer trust are likely to backfire.

"Trust" is a common theme in many banking ads

Even regulators, who might believe they are protecting the market and consumers, are increasingly just creating friction between the consumer and institutions (through increased regulation) and the resulting customer frustration and cynicism works against reinforcing trust.

The only way for us to ‘trust’ banks again like we used to, is changing the way banking works. The greater transparency and the better banking serve customer needs, the more we’ll trust banking to work for us. Transparency, utility and great service are all that ultimately matters now, because the old pillars of trust safety, security, brand messaging, fiscal management and regulation are no longer effective.