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Why New Financial Technology Remains Important

By Jim Bruene on September 29, 2008 5:07 PM | Comments (7)

imageWith all the bad financial news circling the globe, you may not have been thinking about innovations in financial technology. While that's understandable, this is not the time to ignore the fundamental changes occurring in the consumer marketplace (see below).

Yes, we are biased towards new technology, but with registrations to our upcoming Finovate Conference running 75% ahead of last year, there seems to be plenty of people who agree. By the way, this is the last day to save $100 on your ticket (register here) and ensure your ring-side seat on Oct. 14 to see these 24 inventive financial companies showcase their latest improvements.

Finovate 2008 lineup in NYC Oct 14

But let's address the elephant in the room. Is this the time to be concerned about new bank tech products, or is it time to just hold on and ride out the storm? While good arguments can be made on either side of that issue, here are two interesting examples that made bold bets on online technology in the middle of Internet gloom and doom: 

ING Direct, launched during the depths of the dot-com bust (Sep 2000), is on track to become a top-10 U.S. bank by the end of the decade (note 1)

PayPal, also launched right before the low point (Nov. 1999), now has more customers that any other financial-services provider in the world other than the payments gateways themselves (Visa, MasterCard)

Who will be the ING Directs and PayPals coming out of the current crisis? Your guess is as good as mine, but my vote goes to the companies that do the best marrying online services with mobile delivery.

Why financial technology remains important
There's no doubt that budgets will contract in 2009 and beyond. But new technology usually holds the promise of cutting costs or at least making it easier to serve more customers without adding resources. Here are the trends you cannot afford to ignore in your 2009/2010 plans:   

1. Always-connected mobile consumer: Consumer services continue to move online as ubiquitous broadband and cellphone connectivity keeps most banking households connected 24/7 at home, work, and now with mobile, everywhere. Apple's iPhone, and the next generation of competitive devices, are changing the game in mobile. There are already more than twice as many mobile phones in the world as there are credit cards (note 2). And location-based technology allows users to interact with merchants and payment providers in new and potentially more secure ways.

Implication: Mobile services today are about where the Internet was in 1996. And globally, mobile banking and payments will be even more important than online banking and payments. 

2. Over-extended consumers seek guidance: Just as millions of amateur stock traders learned a harsh lesson about risk vs. return in 1999/2000, tens of millions of consumers will are learning the downside of extensive debt and leverage in 2008+.

Implication: This is a great time to get consumers hooked on tools that help them manage their spending, savings, and debt. And virtually all the activity will take place online with mobile support.

3. Branch exodus intensifies: The U.S. over-investment in branches will come to a screeching halt in 2009. With several of the big branch builders, especially WaMu, being acquired, there will be less of a competitive imperative, not to mention less capital, to build fancy new branches on every street corner. Some of the savings will be funneled into alternative delivery. Even the fanciest website can be built today with the fraction of the cost of a single urban branch.

Implication: Increasingly, financial institutions large and small will compete online.

4. Online research is the norm: According to a 2007 study published in November by the National Association of Realtors, 84% of households used the Internet in their search for a house. And in a dramatic change compared to ten years ago, online sources were nearly as important as humans in locating the house that was ultimately purchased (29% found it online first vs. 34% who said their agent told them about it). Similar numbers are reported for autos and other big tickets items.

Implication: A good web presence is crucial to landing new customers.

1. Industry consolidation is helping them move up the ranks, they jumped two spots in the past week alone.

2. Source, Communities Dominate Brands blog, 8 Jan 2007 (with updates)

Comments (7)

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To underscore this- if we, as an industry, don't continue to innovate to better reach, understand, and relate to our customers while better understanding our risks, our industry will continue to become more and more commoditized.

I wish I could be there for this conference, and I hope there's a job for me when I finish my MBA in corporate innovation with a focus on banking innovation!

Great thoughts - I totally agree - sometimes chaos opens up opportunities and provides the impetus for established businesses to try new things. I would suspect that as things settle down over the coming weeks and months, the remaining players will be looking for new ways to grow revenue and cut costs - and innovative ideas will have a chance to shine.

Great post Jim. I'd like to bring up an additional point: Previously entrenched customers may be more inclined to switch FIs. For example, our daily site traffic to findabetterbank.com has doubled since Sept 15. The most popular search terms include "stable banks", "safe banks" and "banks in trouble".

These days, banks REALLY need consumers to open deposit accounts. As Ben noted, with constrained budgets, smart bankers will seek alternative ways to acquire new customers.

Could not agree more. If we look at Santander in Spain, and their low 40's efficiency ratio, other Banks would kill for that. The only way to get there is innovative technology that replaces real estate and people in call centres and branches.

Good points:

@Jonny, there's always a spot for bright hard workers.

@Rob...congratulations on the traffic spike. Good point that this is a good time to snag new customers looking for alternatives perceived to be safer.

Jim, as you know, I respectfully disagree, as I spelled out in my recent post here. You ask above, "Let's address the elephant in the room. Is this the time to be concerned about new bank tech products, or is it time to just hold on and ride out the storm?" That is not, in my opinion, the "elephant in the room." The "elephant" is the profound failure in risk management at the majority of financial institutions in the United States. I do not see any focus today on a "good web presence" or the like as being on point. What any financial services institution -- and I count startups among them -- should be doing is concentrating their efforts on solving arguably the most profound challenge to face banking since the Great Depression.

I realize this is a controversial position, particularly here on Netbanker.com. I have girded myself for the retorts I'll get for not recognizing online personal finance applications as risk management tools for consumers. Maybe they are, but that playing field is more than crowded today. Any startup today trying to crack the code for online personal finance is misguided.

The state of banking as we knew it is no longer. This "new technologies" course is very 2006. We need a 2008 approach to innovation, and that entails a ruthless effort to solve the risk management challenges of today.

Good comment. No one will argue your central point, that financial risk management needs an overhaul. Certainly, as an industry, that's the first priority.

But that doesn't mean individual financial institutions shouldn't still invest in other technologies, especially ones that are practical, save money, and/or move market share such as security, self-service, personal financial management, and so on.

Also, it's still an extremely competitive marketplace. Banks and credit unions still must do things to keep their customers happy and confident in their operations. "Maintaining a good web presence" is definitely on that list...otherwise even the best risk management techniques aren't going to mean a thing if you have no customers.

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