The Future of Finance

Disaster tends to breed a touch of schadenfreude in all of us. As a new generation of Gorden Gecko’s burn under the blowtorch of angry shareholders and world leaders brace themselves for the bill from mass bailouts – it’s easy to answer the question ‘what is the future of finance?’, by simply asking another; ‘is there a future for finance?’.

As it happens, the answer to that question is yes, but not as you knew it. How the consumer experience of finance is set to change is something that I have been thinking about lately for some of my clients. Here are a few of my observations:

1. Mobile Will Become The Primary Transaction Channel
Mobile banking has been talked about for a while, but things are finally speeding up. Interestingly, the catalyst for innovation is not smart phones but dumb ones. In the same way that creating a $100 laptop for the Third World, led to the development of the netbook for everyone else – mobile banking is taking off fastest in developing countries like Kenya and South Africa. For example, Absa Bank in South Africa have now reached a million mobile banking accounts, close to a quarter of their customers base and more than twice the number of their customers accessing from the web.

From Indian workers using SMS to send money back to relatives to Japanese consumers using contactless Felica chips in their phones to pay for just about anything – mobiles will increasingly become both a primary originator of transactions and, with integrated biometrics, an important link in the identity authentication chain.

2. Personal Finance Management Moves to the Cloud
Quicken might have been the state of the art in personal finance in the nineties, but these days, money management tools are moving rapidly online. - or as they are calling these days - ‘the Cloud’. Cloud based upstarts like Mint.com and Wesabe not only offer consumers the ability to track their expenditures, they also draw on their networked data sets to offer intelligent suggestions for saving money, comparing financial products and even alerting users to credit card scams.

Mint.com, for example, has quadrupled their registered users since the financial crisis hit in September. With over 900,000 members, close to 1% of US households, they are able to use their sample data to let you know whether you spend more or less on coffee than the average user, or whether your average purchase price and purchase frequency at Amazon.com, Starbucks, and JetBlue is radically different from someone else with your earning profile. Data is a powerful incentive to share information, particularly for younger demographics. More importantly, these tools are exactly the kinds of features that will need to be rapidly replicated or integrated in the online channels of more traditional financial product companies.

3. Physical Outlets Will Become More Important
Given the growth of online and mobile channels, investing in branch networks may seem counterintuitive. But curiously, as branches become less important for transactions, they will become more important as branding and consumer engagement channels.

In retail circles, the Apple store has become a cliché for design innovation but the Finance sector is catching on. ING Direct were early pioneers with their café branch concept, while more recently Barclays have piloted Microsoft Surface technology in their redesigned UK flagship. Barclay’s Surface program allows customers to manipulate digital content with their hands and access information about banking products with simple gestures.

4. Social Lending Moves Mainstream
If one thing is certain over the next few years – it will become harder for many people to obtain access to personal loans. Interestingly enough, that is exactly the kind of environment under which social or P2P lending players like Zopa, Prosper and Kiva may begin to flourish. Social lending sites work like an online money exchange, allowing people who have money to lend to offer it to those who wish to borrow.

Although micro-credit really began as an innovation to help entrepreneurs in the poor countries to access funding, there is a broader niche in the rest of the world for consumers who might have never used a pawn shop, but still want to access alternative sources of cash finance.

5. Credits Ratings Go The Way of Ebay
For something that is so essential to calculation of consumer risk profiles – it is astonishing how arcane and inefficient the system of credit ratings is. In the US for example, you can arrive in town with a million dollars in the bank and still struggle to get a mobile phone on contract because you have no prior credit history. For inspiration, financial institutions would do well to observe how reputation is recorded and shared online.

From consumers trading with each other on eBay to more subtle attention filters like Slashdot or Twitter – the Web has come up with a variety of ways to manage and mitigate issues of trust. Repayment histories are not the sole determinant of future behaviour. Interestingly, as consumer financial products evolve other factors such as social capital may become more influential.

A recent MIT study of social lending on Prosper.com found that social features such group affiliations and endorsements significantly impacted the chance of a consumer getting funding for a loan request. Such social factors not only doubled the probability of getting a loan request fully funded, but made it possible for a borrower with a priori non-bankable profile to get a loan with reasonable rates.

None of these trends are a panacea for the current Credit Crisis, but in a way that is also the point. The problems facing the finance industry are more complex than the loss of liquidity.

There is a growing disconnect between retail consumers and financial institutions. In the same way the Web changed the dynamics of the music industry – the risk for major players is that others will innovate faster at the consumer level, leaving them the unglamorous role of backend factories of commoditised financial products.

This isn’t great news in a time of generally bad news. But then again, there is probably no better time to stop and re-imagine exactly what the future of finance might look like.

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Comments

[dimitra ekmektsis]

You are a visionary. I'm so glad I've subscribed to your newsletter! Everything you said came true. Through your work I feel as though I'm just hanging out in the future.

[Diane Challenor]

I would like to compliment you on your newsletter. It is keeping me informed of what's happening and a telescopic view into the future. Thank you. Keep up the good work.

[Harold Dimpel]

Interesting article on The Future of Finance. See also mHITs (www.mhits.com.au). mHITs is an Australian based SMS payment service allowing both peer-to-peer and merchant transactions. mHITs have developed a non-bank EFTPOS-like Point of Sale solution to enable their mHITs mobile wallet to be used at the over-the-counter retail transaction level. The initial network of retail merchants was launched in the Sydney CBD (Australia) in February 2009.

[Luke Byrne]

Another extremely insightful post Mike.

Quick note that the link to Prosper.com is wrong.

[Chris Simon]

Great to see you tackling big pictures, rather than colloquial panels talking to themselves and not answering anyone’s questions!

It is funny that new generation Gecko’s are the one’s blaming other generations for previous recessions and dotcom fallout, when a big part of this current one is proven to be caused by them!

Do you not think transactional use of mobiles has been evolving for many years? Users have been entering their mobile numbers and mobile activation codes into website forms and getting text messages and various ‘pushes’ to transaction.

It is a bit of a shame that a lot of those panelists talking to themselves are either interested only in their own tweets or how many ‘followers’ they can get; or suggesting that five2eight year old BarcodeScan and Code Reading technology is this new saviour called QR! QR Codes are great, but how long will they call it new media!

Your retail outlets observation is critical, (I think). Aura Interactive really shook things up locally in Australia years ago with their activities in-mall and on street furniture. In terms of the ING id and lots and lots of newer banks/financial services, I think that café branch style will really extend to processing some kind of redemption if you point your phone at them. I was going to add, without being rude, that it will also relate to pointing your ‘stick’ at them. By this, I mean all kinds of memory sticks and devices. I guess it also relates to what you are saying about clouds. In other words, you could just fly-by these café banks, plug in your stick of data and watch a great deal of secure transaction taking place with data you authenticated in person. I think a lot of populations will still get a buzz from this kind of retail-online relationship for many years to come.

I’m not absolutely convinced on mainstream social lending just yet. I think one has to be a tad weary of all the spoof branding blogs and vlogs before P2P loans start flourishing. Some of the branding organizations that look after new lending product have already blown some reputations! Huge authentication & credibility attached to content and ‘trusted feed’ is needed on this.

Get you on credit rating though! When I won a sizeable chunk of money for some content, a bogus Perth based ‘collector’ contacted me about putting all that money into their a/c because according to them I owed a Europe based bank on a very old loan. Sure enough, they had somehow got some ‘real history’ on me. But I, luckily, had all my archive paperwork and signatories in place that the debt had been frozen and subsequently paid! I sent names and details to Mr. Bogus in Perth with a polite f… off and he or they disappeared. But someone else could have quite easily parted with their winnings or some legit charity could have lost all donations! So yup, whatever credit rating this cretin got hold of was arcane, inefficient and inaccurate. My experience of the US is that if I had a million dollars in one of their banks, I think I would easily get a pretty smart phone!

But YES! I see your point about mitigating and managing trust. But I’m afraid that goes back to the new “greed is good” guys you mentioned at the start of your once again enlightening piece. I think Twitter is amazing, (or I did based on limited use in Europe five months ago); but I think you will find a lot of the world hard to convince of getting major credit, loans-transaction approval through it just yet!

Thanks for a brilliant insight.

Lastly, a little message to those panelists talking to themselves (or counting their ‘followers’)….Talking to yourself is the first sign of madness:-)

[Mike Jarocki]

What did happen to the social lending sites like prosper? They have sort of fallen off the horse, "As of August 2008, approximately 18.5% of all money loaned on Prosper from inception (February 2006) through June 2008 are in some form of delinquency." http://en.wikipedia.org/wiki/Prosper.com

Mike Jarocki
http://www.creditcardfinder.com.au

[Fagin]

Check-out:-

http://www.dgcmagazine.com/BackIssue-html-pages/DGC-Magazine-2008-Special-Community-Currency.htm

[dimitra ekmektsis]

I think I'm ready for another one of your articles, Mike. It's been ages...

[psp games]

I found this article interesting because as a finance student it means a lot for me. This Australian based sms service is good for transaction related issues. You can use this service in any retail store.