For the 2016 Expert Outlook on money, Canvas8 speaks to Chris Skinner, chairman of The Financial Services Club, the industry insider behind The End of Banking, and fintech specialist Duena Blomstrom to find out how businesses are helping consumers manage their spending and saving.
2016 will be about mobile wallets, leveraging what mobile can do at the point of sale. You've already got Samsung Pay, Android Pay, Apple Pay, Chase Pay, and a host of other players out there, but at the moment banks and mobile operators haven't really understood what the wallet and pay system can do. That will start to mature next year into contextual models which incorporate advice, sales and marketing.
The best example to date is probably the Bank of America and Cardlytics. They put together a scheme where as you're walking past a store you'll get a discount voucher on the basis that Bank of America knows that you use that store fairly frequently, and Cardlytics knows that you're nearby. Obviously, permission is important for consumers; the permission you're giving is that you like that restaurant or shop, so it’s fine to receive offers. I spend more, but also save more.
This means having the data analytics to begin with to know consumer preferences. It would be stupid giving an offer for Mothercare to a single guy, so it's contextual but also consensual and based on knowing the consumer’s preferences and sensibilities.
Contextual offers on smartphones tap into Gen Y’s desire for personalised services
Samsung (2015) ©
There's a great example in Brazil of where this may be going. With Banco Original, customers may use Facebook Connect to access their accounts, thereby letting the bank see their preferences. For example, if account holders like the BMW 5 Series, it may buy 200 of them directly from BMW to release to the public, and it'll get discounts from BMW far greater than consumers can normally get. So the whole package becomes far more aggressive in terms of how banks think about partnerships, analytics, their use of crowd-funding or crowd buying in this case.
Most consumers are completely apathetic about their bank provider. They don't see any difference between banks or any advantage in switching, which is why you typically don't see anyone doing so even though the process is now far easier than it was. In terms of behavioural changes in 2016, a key theme will be expectation enhancement. If your friends are getting great services from a particular bank and you're not, then you'll start question that. So when Barclays’ Pingit came out, other banks stepped up and launched their own version.
Most consumers are apathetic about their bank provider. They don't see any advantage in switching, which is why you typically don't see anyone doing so even though the process is now far easier
In the UK, we're going to see Atom and Tandem launch next year – two digital banks. You've also got Starling and a number of others bubbling away. What we're going to see is pressure on the traditional banks to respond to those deployments of technology. Right now, the big four are looking at boosting their front end mobile apps and services, and are actively talking to a range of providers to provide them with that technology. People will want their existing banks to match or better what smaller, digital ones can offer, and if they don't, they’ll be inclined to switch.
Apple Pay is still not achieving expectations. A lot of people thought that from day one it would take over as the wallet of choice for every payment the consumer makes, which is ridiculous. The service is interesting because of its Apple Watch integration and the contactless capability if you're in London, particularly on the underground or in stores with contactless payment, like Starbucks and Costa. The fact that people are using this service highlights how convenience is driving a fundamental change in consumer behaviour.
Wearables are transforming how we pay in-store
Apple (2015) ©
Jonathan McMillan is the pseudonym of our industry insider who authored The End of Banking: Money, Credit, and the Digital Revolution.
Consumers don’t want any kind of friction when making payments. Currently, when booking flights for example, we have to draw out our credit card number and security codes and wait. It's a very cumbersome process. PayPal has already started to change that, where we just have our emails and passwords. Apple Pay's going one step further with just our iPhones to tap at the point of sale. This opens up a lot of new possibilities for monetising transactions. Once we have the convenience where we just click one button and it has all the security behind it, you can use it for very small, low-level transactions.
This will be important for journalism and digital media. Fundraising will be another area, allowing people to support a cause through micropayments. It could bring a whole different meaning to a social movement if you're an NGO or an organisation with a social purpose; you can advertise your cause and if people ‘like’ you, they transfer $0.20.
We're seeing a large increase in the convenience of payment systems used, like PayPal and Apple Pay. It's very convenient, but the transaction costs haven't come down much; Apple Pay still charges 2.5%. I don't think it will happen in 2016, but this is where the payment sector is ripe for disruption, helping to bring the transaction cost massively down.
Margins are coming under pressure, because it’s so easy for customers to use the likes of Zopa or Lending Club. It will remain hard for banks to make money from their customers, and that could force them to take more risks to find pockets to make money.
Consumers have grown comfortable with ‘tap and pay’
Barclaycard (2015) ©
In terms of consumer shifts in 2016, people have become less willing to invest time and effort in conducting their financial activities. Whether it's concerning payments, a loan application, or even investing, there are so many ways to automate now. People use Apple Pay, they use Venmo, they apply for loans on Zopa – they see how little effort is required from their side and they will demand it from their banks. It's like when you used to book a flight and you had to go to a travel agency and spend a lot of time going through the options. Now, you just go on a comparison site, enter your details, and five minutes later you have everything.
Servicing the demand for convenience is easier for small businesses because they can focus on one particular element. There's this lack of mobility for larger institutions to react to new trends or pick up new technological opportunities. They will be left playing catch up with smaller players or may just buy them up.
Servicing the demand for convenience is easier for small businesses because they can focus on one element. There's this lack of mobility for larger institutions to react to new trends or pick up new technological opportunities
For example, with Lending Club, several banks would just outsource their whole consumer loan underwriting to the smaller service. So if you want to get a consumer loan in the US, you are directed to Lending Club. It’s become an agreement that the fintech company sells its services to the bank. What we’re also seeing is that banks will often create tournaments for fintech companies and the ones that win get funding.
The most exciting innovation in 2015 has been blockchain technology. It’s been around since 2008, but what's happened this year is that the entire industry has embraced the blockchain and the shared technology ledger. This allows transactions to be made without needing a central clearing agency, meaning that, for example, shares, bonds, or any kind of contract can be sent to another party without any transaction cost. This could save billions, potentially bringing costs down to 0.1%. This would be truly disruptive. Imagine how many transactions take place in our modern economy. If you saved just 1% from those transactions, the impact would be huge. Consumers would enjoy lower prices, you’d have more efficiency and it'd make everyone happy.
Why bother with change when you can swipe your smartphone with minimal fuss?
Elenovela (2015) ©
Duena Blomstrom is a fintech and digital experience specialist at Duena Blomstrom Consulting, an angel investor and top 20 City AM Power Influencer.
The main thing that will happen in 2016 is that one or more of the big technology companies will decide to enter the financial services market. This is, of course, no surprise to anyone in the industry, but banks will nonetheless react as if this is a gobsmacking shock and will likely challenge their legitimacy in terms of data security to highlight their role as trustworthy data custodians by contrast.
More and more customers will break from the bizarre spell banks seem to have them under, where they forgive poor service with much more ease than they would for any other company. We currently experience shortcomings in mobile and internet banking services, but seem to forgive these glaring malfunctions, accepting that there’s a huge gap between the app we use every day and what banks should provide us. This will change in 2016 due to the rise of challenger banks as well as other financial service experience layers, such as insurance or telcos, which will offer fresh, functional alternatives. Consequently, banks will have to quickly step up.
More and more customers will break from the bizarre spell banks seem to have them under, where they forgive poor service with much more ease than they would for any other company
Banks are entering a period in which they must innovate or become a ‘dumb pipe’. Anyone will be able to offer the same products they do, and most of those who make an attempt will package it in a better user experience, start from more profitable business models, and will have the potential to become stronger in brand capital than existing banks. This is a battle for the consumer relationship, not the ability to offer more on a savings product. Some banks are fortunate enough to have a culture that allows them to understand this and be visionary and courageous, so they will try interesting things that most will not. Of the ones that will fight for this relationship, many won’t be fast enough to turn their immense ship, but some will and those will stay in the game while others become part of the infrastructure.
The rise of robot advisory, AI, and big data storage and processing were all very important in 2015, but the year was defined by blockchain. The industry finally began to understand what distributed ledger technology is and what promise it holds for innovating many parts of its process and tech. Understanding it and imagining the right usage cases – from the evident digital currency to internal processes, and more importantly identity and smart contracts – is a complex job and will take time, but most banks have begun processes to do so. For an industry famed for being slow, we’ve been abnormally agile at exploring this particular trend.