We think about FinTech here, a lot.
First, it dovetails neatly with the fact that I spent almost twenty years working at a host of financial institutions, from monstrous international banks to niche investment advisory firms.
Second, it is almost unbearably obvious to me how much change is on the way when it comes to banking. To many, it’s remarkable how unprepared banks seem to be for the very future of their business.
For incumbent financial institutions, entrenched and coddled by a regulatory framework built up around them, the basic business question is just how painful this change will be. Banks aren’t defined by, or reliant upon, physical assets any more. To a consumer, it doesn’t really matter whether there is a thickly-columned building on the corner with a vault in the basement full of money. To the modern consumer, banks are transaction facilitators, but banks don’t seem to know it. You have to wonder how it’s possible, as the New York State Financial Superintendent did recently, that “in an age of smart phones and on-demand technology, we have a disco-era payments system.”
Just yesterday, I had the sort of interaction that crystalized, perfectly, just how poorly banks understand themselves, their customers, and the services they must offer to make them relevant in the future.
I have an account at one of the big US banks, which is also one of the ten largest banks in the world. They are a sophisticated, complex global institution involved in virtually every aspect of the world’s financial markets, and have a couple hundred years’ worth of experience with retail banking here on home soil.
Dave, the fellow whose house my family and I will be moving into at the end of the month also has a bank account at this same place, and all I need to do is set up a recurring monthly payment from my checking account into his. I mean, how hard can it be?
As a FinTech believer, I first see if I can do this from my phone on their mobile app, but I can’t add a new account to the “transfer to” options, so I go online. From their website, I can’t add an account to “transfer to” that I don’t “own” from the bank’s point of view, and I guess I understand that – maybe they’re worried about me trying to pull money from someone else’s account, though you think a line of code would solve that problem (i.e. funds can only ever flow out of your account into someone else’s).
So, I go to the “bill pay” feature to solve the problem only to learn that if I set an individual up in bill pay, even if that individual has an account at this very same bank, rather than transfer the money electronically, what “online bill pay” will do is print out a paper check, mail it to him, which he’ll have to countersign and deposit physically.
This online solution is some kind of high-tech Potemkin village, a façade in front of the halting drudgery of stamps, mailmen, and pieces of paper. Interestingly, the bank has a “payment” feature that lets me email a payment to someone, and so it prompts me to try to send money this way, and a first glance makes it appear to be incredibly straightforward.
But hold the phone: there’s a $2000 limit on how much you can transfer to a single person in any day, and while I wish this weren’t the case, rent being what it is in the Bay Area, it turns out I would need to send rent to my landlord over a three day period, via three separate payments.
Mind you, this is the same bank that provided me with a credit card whose limit is high enough to allow me to drop by a Toyota dealership and take home a new Prius with a single swipe, no problem.
But email a few grand in rent? Nope.
Now, the website alerts me that if I was a Private Bank client I could have that limit raised to $5000, so the limit is arbitrary, but I would have to suffer the entire on-boarding process to become a Private Bank client simply to pay my rent. I can’t bear the thought.
I think about this, grab a cup of coffee, and march across the street into a physical branch to figure out if there is some way to simply transfer this money, electronically, which is more efficient for me, more efficient for my landlord, and to be 100% clear, more efficient for the bank: no multi-step process of printing and mailing checks, no checks for tellers to process, no buildings to buy and maintain and fill with tellers in the first place. Just clean, cold data entered directly into the bank’s system by their own customers.
For all these reasons in combination, whatever money they make on this kind of transaction would be, literally, one of their highest-margin revenue sources.
I enter the bank, eager to learn how one of the ten largest and most sophisticated banks in the world will capture this high-margin revenue stream and simultaneously satisfy two of its customers.
After a caucus involving two tellers, a banker, someone the banker had to call on the phone (and me waving off a Private Bank guy) this is what happened: I stood in line. I had the teller fill out a piece of paper that indicated my desire to withdraw the rent from my account, and fill out another piece of paper that deposits the rent into Dave’s account. The teller physically moved a small pile of money, from behind his window, from one drawer to another. He did smile and tell me to have a nice day, which was a nice touch, but to be clear, there was no way to do this electronically, or online, or via my phone. So I’ll be back again next month.
I’m an old guy, and so I am habitual and to be clear this outcome won’t see me looking for another bank. I mean, I remember when you had to get to a bank before 4pm on a Friday if you wanted to have cash in your pocket for the weekend, and still feel grateful whenever I see an ATM.
But when I look at my kids, or imagine anyone weaned in an era of mobile technology and think about their expectations, they literally won’t be able to fathom why they can’t push a button and move their money from A to B, instantly, within the same institution. They would view that as a criminal failure of service, of totally misunderstanding your core mission. And the kids simply will not be customers of yours.
Begging the question, who will your customers be?
I don’t know who at these banks is having conversations about their future, and what their service offering will have to be in order to enjoy an even basic relevance, but if I’m that person, I would be doing an awful lot of hard thinking right now. Because while wars, depressions, recessions, inflation, and a recent little problem with real estate, credit derivatives, and leverage failed to bring down the banking system, unless banks change the way they do business, when I look at my two girls, I get the feeling they just might.