10th February 2012
"Traditional banks risk being disintermediated by social media websites that are increasingly looking for additional revenue streams beyond advertising. This is a natural extension of the rise already seen in comparison and aggregator sites, especially for more commoditized products such as small loans, general insurance and credit cards. Examples of recent activity include the social payments startup Twitpay, the virtual currency Facebook Credits and the acquisition of the U.K. price comparison site BeatThatQuote by Google."
This has been both push and pull. In an effort to save costs, banks have neglected face-to-face consumer relationships and pushed day-to-day banking business online or over the phone. But equally, the next generation are used to transacting in a different way. As the Kevin O'Keefe blog points out : "Many younger people have never received a paycheck they needed to deposit with the bank. Direct deposit means they've never walked up to the teller window on Friday night to deposit their week's pay and get some cash. They've never thought it necessary to say 'Hi' to bank officers when making the deposit so as to establish a banking relationship for a future a home or business loan."
Social networks will be there to pick up where the banks left off, feeding into the idea of ‘Building Your Own Bank', which is increasingly gaining currency: Chris Skinner of the Independent was one of the first to highlight the possibility : "technology is now a social channel, and banks are struggling to work out how to be social. After all, so many of them are, by nature, anti-social.
"Looking to the future, it is technically possible for a consumer to build their own bank using plug-and-play apps from different providers to suit their individual requirements. This will be a challenge to banks, requiring them to open up their closely guarded systems and technologies as customers are now in control."
He has developed this idea on his Finanser blog : "The iDEAL system originating from the Netherlands gains more traction for banks across Europe as an alternative to PayPal; this is in the same moment as AMEX opens a P2P platform, as does VISA, as an alternative to PayPal; and this is in the same breath as PayPal stretches out towards physical store paypoints to compete with VISA, AMEX and MasterCard, as the online world merges with the offline.
"A similar story can be seen in capital markets where the rise of Chi-X, from upstart electronic trading platform to the biggest trading system in Europe, took place in just two years."
However, the key factor in these cases was deregulation, not likely to be seen in the banking sector any time soon. Equally, mobile apps or social networking sites are not likely to replace the core of banking – the holding money area that is protected by banking licences – but around the boundaries of banking. Skinner adds: "The thing is ‘the boundaries' is where all the profit lies. The boundaries are everything from savings to investments, cards to loans, trade finance to treasury dashboards, insurances to wealth management, foreign exchanges to bond markets, pensions to mutual funds, swaps to futures, mortgages to marriages."
Of course, the alternative would be to go the whole hog. The Huffington Post explains how someone might go about building their own bank. It is true that the requirement for between $12m and $20m in cash may put some people off, but it suggests this could be raised from the local community. There are even websites that help people start out like Startabank.com.
On a smaller scale, mobile wallets are likely to be seen in the near-term: "Consumers like the convenience of using their phone for a variety of purposes including transportation tickets, payment for goods, loyalty point management and couponing. This convenience is enhanced tremendously by NFC (near-field communication) capability being introduced on devices, so it is no surprise that NFC-based mobile wallet users are expected to grow to 594 million by 2016." As yet, there is no sufficiently exciting app to make consumers discard their real wallets, but it may be on its way.
The face of consumer finance is changing; Social networking sites may well be the beneficiary, and the traditional banks will have to adapt.
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