Digital technology and business models are widely expected to disrupt financial services, although this hasn’t yet happened even after two phases of digital innovation. In fact the real opportunity for disruption is to reinvent what the ‘service’ in financial services means. For example, by reducing the worry and drudgery involved in managing money – what if a bank offered a service, not which helped individuals become financially secure, but actually did the job for them.
This doesn’t mean a service that makes you rich, but one which provides financial security. For most people financial security is a long way from rich – it’s having enough money to eat, pay bills, deal with emergencies, go on holiday, educate the children, and retire comfortably.
So far banks have treated digital technology as a way to improve convenience and produce nifty apps. Firstly by offering online banking and some admittedly pretty neat apps that help with things like buying property or managing share portfolios. In this first phase of innovation, the same old banking products and services got an online front-end.
Innovation is now moving to a second phase based on removing ‘friction points’. Friction points are anything that create effort and delay without adding value. Payments – or to be really pedantic, the actions required to pay – are friction points that stand between a consumer and a purchase. Making purchasing faster and easier is a logical evolution in convenience from the first phase. And the significant payoff is companies get to accumulate huge data sets (‘big data’) about customers and their purchasing behaviour, that enable them to sell more of their own products or sell advertising.
There have been signs future innovation will be social – peer-to-peer lending is already big business – but an alternative is to reinvent the ‘service’ in financial services.
Today’s retail banks which are little changed from fifty years ago. Banks keep your money safe, enable you to access it on demand, lend you money when need it, and provide buy-now-pay-later services (credit cards). These are structured as discrete products that are often complex and need to be separately bought, or applied for with the real possibility a customer will not be allowed to purchase what they want.
In terms of service, banks generally think it means ‘customer service’ or being friendly and getting-it-right-first-time. A higher value definition of ‘service’ is doing something on your customers behalf so they don’t have to do it themselves.
The starting point for reinventing ‘service’ is to look at how people live and what ‘job’ a financial service might do for a customer. Surveys consistently show most people are worried about money some or a lot of the time. 30% of Australian households live paycheque to paycheque. 17% of Australians could not find $500-$1000 if needed in an emergency. 43% women and 38% men do not consider themselves financially secure. Compulsory superannuation is intended to ensure individuals have sufficient retirement savings and works well for those in permanent jobs, but excludes others like those who work for themselves. And the future looks increasingly uncertain, even for those in permanent jobs, with less employment security, and more casual and freelance jobs.
This totally new financial service would, regardless of how much I earn, manage my money for me and make me financially secure. It would mean I never had to pay or even look at a bill yet knew I was not being overcharged; had money available as and when I needed it; and knew I was going to have enough money for retirement. In other words, the financial services the wealthy take for granted, with their teams of personal accountants and financial advisors, would be democratised and available to everyone.
This service would genuinely disrupt the existing financial services industry whose organisational structures, profitability, IT systems, and processes are hard-wired around existing products.
Apple Pay may start this disruption. Apple are not known for simply following trends, so its possible Apple Pay will start by making payments insanely easy, then, say, launch a banking platform – an App Store where this totally new financial service would be available via apps which tuned the service to the needs of different customer segments.
Trust is critical in financial services, but customers already trust Apple enough that they hold the details of 800m credit cards on file (growing rapidly) and Apple already position themselves as a trusted provider of apps.
Of course I might be quite wrong about the future direction of Apple Pay but unmet needs and changing circumstances have a habit of attracting innovation and disrupting existing competitors….