April 7, 2011 |
Slowly but surely the banks and large financial institutions appear to be losing their stanglehold and franchise on the right to keep and process your money. It seems like each quarter that goes by, we see new entrants into the field of either Personal Financial Management (aka one of my favorite acronyms ‘PFM’), spend analysis (with the promise of consumer savings) or yet others who wish to wrest control of the customer from what are often portrayed as monolithic institutions.
In the early days, the financial institutions made money almost the ‘old fashioned way’. Simplistically speaking, they would take your deposits, pay you a small amount of interest and then loan some of that money out at a much higher interest. The world was a much simpler place back then.
Along came credit cards, debit cards, ACH networks and the famous deregulation which was supposed to introduce competition and therefore foster innovation. After several major financial upheavals (does anyone remember the S&L problems of the past), we are now entering into a new era of money management and online payments.
Paypal was one of the first to break the mold. While they got their start in the world of person-to-person payments, they are now a major processor of financial transactions. The nightly float on PayPal payments alone would probably be a surprisingly large amount. But PayPal, inspite of all of its innovations runs the risk of being left behind in the new world of banking. It is not a ‘destination’ in and of itself but a facilitator of money movement.
Facebook recently set-up a legal entity known as “Facebook Payments Inc”. Facebook has the advantage of being a ‘destination’. Imagine that you owe me $20 dollars. I see you on Facebook and send you a gentle reminder. What could be simpler than using a Facebook service to move that money. Does Facebook do it directly? Do they act as an intermediary? Do they refer to you an established vendor?
Need another example? How about Square. Their vision is to enable everyone to be able to process credit card payments. Owe me $20, just pass me your credit card and I will do a quick swipe and we will be done. The end destination (for now) of your cash may still be your FI but who is controlling the customer relationship here.
We recently looked closely at another new banking model. In order to be a customer of this bank, you must have an I-Phone, I-Pad, or an Android device. PC only need not apply. Oh, and by the way, this FI (it is not really a bank) can provide services that traditional banks can only dream about (e.g. real-time alerting on any transaction, for example). They intend on controlling 100% of the customer relationship. What happens to your money? It is keep in a traditional banking institution which performs traditional banking functions but that is totally masked to the end user whose mobile enablement feels hip and cool – especially to Gen Y digital natives.
With all of these new models comes new challenges in the Security, Risk and Fraud arenas (you knew that I couldn’t blog without at least one shameless plug in this area). The mobile devices that Gen Y covets so much are becoming more and more subject to attack.
Your Smartphone is not really a phone. It is a computer which happens to have a phone built in. Zeus, rootkits, botnets, shims – all of which were once confined to the PC playground now have a whole new world. Click on the wrong malicious link with your i-phone, and your entire data buffer could be happily making its way to a third party along with all of your personally identifiable data. Android users have the added burden of making sure that the applications that they download come from a reputable source.
Contactless payments and Near Field Communications will provide a new attack vector which has yet to be fully realized. For these technologies to be successful, the FI’s will have to radically change their approach to security. It can no longer be thought of as an “Oh, by the way….” but must be an active part of the eco-system. In a recent Javelin research study, 49% of consumers felt that contactless payments were ‘unsafe’.
Traditional FI’s must become more nimble and quickly bring to market products and services that will appeal to the next generation of bank customers. It is only through the complete understanding of consumer needs and wants can the traditional FI compete in this new world. Continuing to roll-out products that don’t have relevency or are not first to market to the next generation of consumers will only result in the continuing slow decline of the prestige, power and influence of the large FI’s.