P2P Lending and Online CD Auctions

I realize I’ve written about P2P lending in the past but when I saw in NetBanker that Lending Club was getting back into the market, after suspending operations this spring, I became intrigued.  I realize this is a new service and you can’t directly compare it to a seasoned business.  However, from the filing while they were booking new loans it appears that a substantial number were financed with the company’s own funds.  They were also keeping the loan rates lower than the market could have been, most likely to attract customers looking for a loan.  This was probably somewhat of a discouragement to attracting potential “lenders” as the returns would have been reduced.  In other words they were effecting natural market conditions.  Another interesting note was that fully half of the loans that were booked were to reduce credit card debt.  Which I feel shows where the current growth in their market truly lies.  I’m still not fully convinced that the market can handle too many of these “services” right now.  Currently the general population are hearing through the media about the stresses on the economy, whether real or not,  and consumer psychology is what drives the market.  With consumers conserving and saving funds and dealing with fuel inflation there really isn’t a lot of excess consumer funds or deman to place into a somewhat risky investment vehicle as these loans tend to be.  In other words I think the market is still last resort for people looking for a loan and their is more demand for these funds than supply.  I think these businesses are going to struggle until the consumer psychology starts to turn and the demand to invest picks up. 

So much for the asset side of the balance sheet.  Recently on the liability side MoneyAisle has come online.  In a nutshell it is LendingTree for CDs.  Customers login put in how much they are looking to place and the term of the CD then the 72 banks currently in the program bid on the money.  Except for the marketing and free press aspect I’m having a difficult time figuring out what the banks really gain from this.  Granted the dollars are small and they don’t have to bid but small banks have enough competition in their own markets and now they are competing on a national scale to attract “expensive” funds.  This is nothing more than national rate shopping.  These customers are most likely not going to add additional products from the bank that books the CD and when it matures they are going to leave.   Unless the bank is de novo, just opened their doors, or is having a difficult time attracting funds I’m struggling as to why a bank would put a lot of these CDs on the books.  For MoneyAisle to be successful they are going to need a lot of banks because each one will probably plan to only put a small amount of these expensive funds on their books.

I like the fact that people are testing the markets for new delivery channels and this is all pretty interesting.  If you don’t try something you will never know if it really works or not.  So, I do applaud all of these people for giving us the consumer more options.  The real test will be how it helps their businesses.

Positive Employee Experience… More Customers and Growth

Last week I attended the Enterprise 2.0 conference in Boston.  It got me to thinking about how these “new” tools can effect the way we do business.  My colleagues at nGenera, Don Tapscott and Tammy Erickson, have spent a great deal of time researching and talking about how the different generations (Boomer, Gen X, Gen Y, etc.) approach work and technology in general.  I’m not going to discuss that, directly, but I am going to discuss what can be learned about today’s technology and how we can make our bank and credit union institutions competitive and functional in the marketplace.  Because if we don’t innovate and evolve we will wither and die.  The key is to do this in a smart way.  Not to just throw the newest and greatest thing in the marketplace into your mix.  To spend time and energy on something to just sound cutting edge, if there is no business purpose to it, is a fools errand and you will actually be less efficient.

I believe that if smaller institutions start embracing Web 2.0 collaborative technology they can use this to grow their franchise with the younger generation and expand their market outside their geographic territory.  This is especially true with the asset side of the balance sheet.  Deposits, other than CDs, are more difficult to attract because larger banks have an advantage with their ATM network.  However, there are ways around this, too.  The more innovative institutions are reimbursing customers for foreign ATM fees now.  If this continues I believe that ATM fee income will evaporate over time and banks will need to look for another source of revenue anyways.  It is the smarter institutions that are planning for this possibility.   More than just about any industry “retail banking” tends to take a wait and see attitude to anything new.  Whether it is technology or new delivery methods no one wants to be first and everyone copies everyone else.  More and more we are seeing non traditional banks coming into the “banking” arena.  With companies like Merrill Lynch offering traditional banking products and retailers like Wal-Mart working to change Depression era banking laws to break into the market.  The key is to now capture the Facebook generation with the services and delivery channels, not necessarily different products, that will attract them.  If some of this collaborative technology is used in house so that your summer interns and recent college graduates can get their ideas shared and acted on this will should naturally flow into customer delivery.  Especially if these younger employees, through their Facebook and LinkedIn networks, start bringing in more younger customers.  The key is to listen to them and handle this the right way otherwise these networks will be used against the institution.   You won’t be able to attract these workers, or younger customers, to your institution.  This will in turn, lead to a contraction in your customer base over time as your older customers aren’t replaced with newer ones.  If we have learned nothing else today’s technology has sped up information flow to either our benefit or detriment.   I believe that even though larger institutions would seem to have a leg up with their financial resources and in house expertise.   Smaller institutions have opportunities to effectively compete and grow due to their flatter organizational structure and ease to move decisions through to market. 

 I would be interested in hearing your thoughts on this topic.  Specifically, if you are currently going down this road and what the results have been.

Enterprise 2.0 conference

nGenera is pleased to be a sponsor of the Enterprise 2.0 Conference June 9-12, 2008 in Boston at the Westin Waterfront Hotel. By clicking on this link you can save $100 off of the registration or get a free pavillion pass. Other sponsors include Microsoft, IBM, and Oracle.

Customer Service Upgrade

It is difficult to charge someone for something that they are used to getting for free.  That is unless the service receiver can either see value in it or the service is new and different enough that it is an “upgrade” to what they had been receiving.  I’m talking about customer service at banks or credit unions.  Now there are different types of service every customer needs.  However, a lot of call centers are staffed as one size, fits all.  Since above all banking is a service, how the customer is treated and if they get their issue addressed on their first contact will go a long way to making that customer happy.

Let me draw an example with another service industry, transportation.  Specifically the airlines.  There used to be very little competition in the airline industry but the funds airlines put into on-board service and aircraft maintenance were more or less guaranteed.  Then what happened, the airline industry was deregulated.  This was a huge boom to the traveling public with more routes opening up, airlines could serve where their was demand, and the biggest benefit being prices dropped.  Also,  new airlines stepped in with a different model on how to run an airline (Southwest).  Let’s address this a little more.  Customers accepted what Southwest had to offer because they knew what they were (or weren’t) going to get for service up front and the price was cheap.  But the existing airlines now had to compete with this model and their customers were used to a certain level of service.  It has taken a while but it seems that the airlines have finally organized themselves where they can make money (under normal circumstances).  They offer lower fares but still provide more service than the low cost carriers.  They still offer First Class which can be purchased or used to reward their frequent flyers. 

I know this is a rather abbreviated example of what the airlines have experienced over the last 20 or so years.  I wanted to use this to show that similar things have happened in banking in roughly the same timeframe.  Even though banking is still heavily regulated.  In a lot areas certain restrictions have been lifted.  The biggest example would probably be interstate banking.  We have seen many banks merge over time to where there are really two major tiers of banks.  Community banks which stress their attachment to the community and service and large national banks who stress their branch networks and markets served.

Over the years I have worked for and with both types of banks.   The smaller banks tend to offer more personalized service and can react to an customer quicker because approvals etc. have less layers of management to go through.  However, due to their size they have smaller financial resources to tap for both technology and the number of staff to come up with new products and services.  Larger banks do have greater resouces both financially and with the number of staff members.  However, being able to call the bank and get the same person twice to fix a problem is next to impossible so customer frustration levels get elevated.

As I’ve stated in a previous post the cost of “technology” is decreasing so that hurdle should be lowering for smaller banks.  What they can also leverage is not just taping into their own staff for ideas but opening up lines of communication directly with their customers and the community.  By builiding an online community on the Web they can open themselves up to the whole world. 

Banks don’t stress this to the outside world but they do look at how profitable a customer is and will use that information to price products for their more profitable customers.  However, one idea that hasn’t been looked into is allowing customers to pay for better service and advice.  Why can’t their be different tiers of support with agreed upon issues that will be handled by the lowest tier for no cost (a bounced check, an issue with a cleared check, etc.).  But if someone wants some investment advice as to which CD is better for their needs etc they can either pay a one time fee or if they have a constant need they can “pay to upgrade” themselves.  The customer could pay an annual membership fee for instance.

I recently ran across an article on NetBanker where it talked about a recent service from H&R Block for this year’s tax prep that described a similar approach.  You can either pay one fee to file by yourself online or a separate fee to do it with a representative online and there are all different layers of service.  This will get away from a one size, fits all approach.  This way the customer who wants or needs greater expertise in customer service and is will to pay for it will.  This could also effect the cutomers’ loyalty since you have given them the opportunity to upgrade themselves.

P2P Lending Follow Up…

The saying is “necessity is the mother of invention”.  In this case necessity may be the mother of demand.  A few months back I wrote about P2P lending and what kind of future it would have.  It seems that demand for these loans is picking up since banks and conventional lenders are tightening the spigot to loan dollars.  Especially, when it comes to small businesses.  These loans tend to have lower rates than credit cards.  As long as the loan can be funded it might also be easier to acquire rather than going through the necessary paperwork a conventional lender would require for a home equity loan.  There is also the issue as to how much equity there is in the home with housing values coming down.  Which is another risk existing lenders may not want to shoulder.  According to the Wall Street Journal article which says the current market for these loans is $100 million and expected to increase tenfold by 2010 it is still a relatively small amount compared to the entire market. 

I would contend that if traditional sources of funding shrinks and the demand is still there the market will turn more and more to any source, including P2P, for funding.  If this happens and borrowers find P2P lending as easy and secure as they demand why would they ever have any desire to return to traditional lenders.  I can see potential parallels to this scenario and that of the U.S. auto industry of the 1970’s.  Where the auto industry ceded the lower end of the market to the Japanese.  When the consumer found they could get a better product cheaper they became loyal customers and never went back to domestic cars.  I’m not saying this is going to happen.  However,  if current players in the lending market wish to remain there they should have a strategy to at least compete and tap into this market.  Zopa, one of the P2P lenders partnered up with a half dozen insightful credit unions earlier in the year to offer Zopa’s services.  In a recent conversation I had with Doug True from FORUM Credit Union, one of Zopa’s partners, he told me that as of right now most of their customers taking advantage of this lending option are individuals.  However, there are “micro businesses” who are also using this service.  A lot of micro businesses that are started and run on the Internet would be naturals.  These people understand the Internet and they can easily shop from a loan on-line rather than run around to a bunch of banks or credit unions.  Doug also informed me that they are going to be expanding education, in conjunction with Zopa, of this promotion to their members.

The Gen Y and other Internet savvy borrower are the natural introductory market to use this as their first source for lending.  After-all, the number of Internet banking customers is always growing.  This lending option is just an extension to that.  Also, P2P seems designed for the Facebook, Gen Y demographic.  I’m starting to think that P2P lending is here to stay and with the current lending contraction by financial institutions this is just the push it needs to be a real player.

Why aren’t you happy with your bank?

I could go on forever with this one.  But the fact of the matter is with all of the technology and systems thrown at the banking industry it should have freed us all up to spend more face time with our customers to learn their needs and provide them the right amount of service.  Instead things that are supposed to make life easier for us and the customer seems to only make them angrier when it doesn’t work like it is sold.   Not only that, but customers get the impression that they are looked at as just numbers to make sales quotas.  For instance, there is this trend for tellers to be selling to customers.  Yet I would guarantee if you asked that teller a lot of detail about the product they are selling they couldn’t answer it.  Nothing annoys customers more than waiting in a long line at the bank for a simple transaction while a teller prolongs another customers  transaction time with a “sale”.  If I go to the bank to make a deposit that is all I want to do.  I don’t need a teller offering me a second checking account.  (This recently happened to me.)  I’ve even been reading where if a customer calls to complain about a simple error at Chase the first words out of the mouth from the person on the phone is to offer to close their account.  How is that customer service?  All the customer wants is the problem fixed they never thought about leaving.  I hope is a simple misunderstanging, but obviously harmful, mistake on the part of the call center staff and not corporate policy.

There are also examples of the circle of hell.  You contact a call center and they can’t answer or solve your problem, then you are directed to the website ”so you can do it yourself”, which also doesn’t work and you go to the branch to speak to a CSR, who in turn has to call for assistance.  This is the part of the blog where you are laughing uncontrollably because you have witnessed this scenario.  Why is this such a problem in our industry?  Are the products so complicated that the staff can’t explain them?  Are there so many workarounds in an antiquated mainframe that the staff spends more time and money fixing things than booking new business?

Today customers have the internet avenue to voice their frustration.  They use it to collaborate on solutions and workarounds of their own.  If one user finds an “unlisted” 800 number around the voicemail phone tree.  They post it for anyone to get and use.  If one customer had a bad experience they will post the exact sequence of events.  Even about banks that have a reputation of being customer friendly.  And for banks that have had struggles with customer service over the years (BoA and PNC).  There are also blogs like Thad Peterson’s “Banking on Customers” that works to help identify problems and solutions in customer service from the bank’s viewpoint.

One area as an industry that we have pushed to the limit is fees.  We have all become reliant on fees for their stable source of non-interest income.  I would contend that there are a couple of ways to use fees.  The one that has been around forever is to dissuade negative behavior (bounced checks and overdrafts) which I feel is appropriate.  But the one that started small and grew and grew, levies a fee for positive or neutral behavior (ATM).  We have either reached the limit that consumers are willing to accept since now the number of ATM transactions is shrinking or we are almost there.  Some banks and brokerages are now offering to reimburse customers for ATM fees they incur outside of that institutions network.  If this keeps up that source of income is going to shrink if not disappear altogether because customers are no longer willing to pay it.

It appears not many, if any, institutions are exploring a way to make their website a money maker.  Why not sell ads to area businesses on your website?  This can start to make up for a reduction in other sources of revenue.  If you can make a splash by having no fees and have this source of revenue to fall back on then you also have a leg up on your competition.  Not to mention by being the first to do it you can get the cream of your local companies to advertise.  This in turn should make your website revenue dollars go up.  Why not even do a joint promotion with a local business?  It is a new operating environment that we are working in.  We need to think smarter and more creatively while keeping the customer mind.

Day of Reconing, SecondLife Banking will be no more

In my post, ”How soon before there is a Web 2.0 retail bank?“, I mentioned that Wells Fargo is taking advantage of SecondLife by building an online community and educating consumers on their products.  As we will see, that is one of the smart way to wade into the Web 2.0 banking arena.  Until an institution can decide how they want to deliver products and services, based on the feedback they get from their customers, the education option is the safest way that any established institution should be exploring.  I’m bringing this up because SecondLife has banned banking from its site effective Jan. 22nd as reported by TechCrunch.   These “banks” that were actually accepting transactions only existed in the virtual world.  The problems and fraud causing this shutdown echos what is said in Bank Systems & Technology by Maria Bruno-Britz that “accountability is so important in financial services” and myself, in the above mentioned post, where I talked about an institution’s reputation and dependability.  Trust and reliability are the lifeblood of a successful financial services.  This isn’t to say that your bank can’t go out of business.  However, some government agency is always looking over their shoulder to make sure they are obeying laws and regulations.   When the marketplace advances very quickly the regulators and legislatures react after the Wild West effect has taken place.   What we are seeing here is that the market is self regulating and SecondLife has done the smart thing and shut this service down before any more bad press can hurt their reputation. 

If this story gets into the mainstream press it has the potential to continue to leave consumers with a bad taste for web based banking.  This is especially true if consumers can’t draw a distinct line between the different offerings from various institutions and instead see them all as the same.    

The question remains, who is going to be the leader in the Web 2.0 banking world?  To this I think there will be no one answer.  Each bank or credit union will probably adopt some of the new technologies to fit their market and customers as the need arises.

Maybe my name should be “Carnak”

A funny thing happened while I was in the process of writing my last blog post.  Zopa teamed up with a list of credit unions in the U.S.  Now, part of this strategy is marketing based, to get their name out there and to make a presence.   But, a big part of it is also market based.  As I stated in my last entry until they had a way to tap into the wider market Zopa would stay a minor force.  This strategy also gives Zopa access to an existing funding source with an established market presence, in the form of their CU partners. 

Based on the following quote the forward thinking institutions, like these CUs, recognize that they need to do something now to tap into the needs of Gen Y, “The merging of financial services and social networking is a great way to reach the younger generation,” says Doug True, senior vice president of FORUM Credit Union of Fishers, Ind., one of Zopa’s launch partners.   I applaud Zopa and their credit union partners for attempting to get the ball rolling and experimenting with new products for the market.  Again, to reiterate what I mentioned in the last post the cost of establishing a program like this isn’t very great.  Not to mention, by being new and innovative they are getting a lot of press, me included, off of this offering.  The jury is still out as to whether this will be successful.  There are a couple of barriers to wide acceptance.  The first question is, will a large enough segment of the general public want to get involved and be direct lenders to strangers, in order to make this a worthwhile program?  How about the timing of this offering?  With all of the credit issues in the news lately will this also put off potential lenders?  Most of the market of potential borrowers, for these high rate installment loans that this program is offering, are exactly the same people that are having difficulty today making mortgage payments.   The best I can say for now is “stay tuned”.

Getting back to the subject of Gen Y…

They may be youngest generation in the workforce right now and yes, they take to new technology and social networking easily.  However, they are still just consumers who want the same service like everyone else.  Heather Peters of Pleasanton, CA based Javelin says, “It is a common misconception that Generation Y is a web- or digital-only generation who sees no value in face-to-face interactions or traditional channels, such as ATM, branch or phone…”.  As most of us who have been in the industry for any period of time will attest, this is one area we can improve on.  There are many reasons for some quality deficiencies in our industry and I would be interested in hearing your take as to which ones are the most critical and how they can be addressed.

Lastly, I would like to point you to a very good blog post I ran across from Tim McAlpine’s entry on the Open Source CU site.  He also touches on a lot of the subjects I’ve spoken about here.  The main one being, no one in banking organizations in general are taking ownership or sees the importance of these new ways of doing business.

How soon before there is a Web 2.0 retail bank?

Is today’s traditional retail banking market (“brick & mortar” banks) such that a purely web based bank (no offices whatsoever) is going to come out of nowhere and eat the lunch of traditional banks?  If there is any industry that would appear to be ripe for these forms of delivery it would appear to be any kind of financial services.  Financial services transact business with no physical inventory, just financial information.

 

The examples of anything close to an internet only bank sprang from the internet boom around the turn of the millennium.  However, most (if not all) of these institutions have either been purchased by another institution (Security First Network Bank by Royal Bank of Canada) or have failed (NetBank).  Today it is difficult enough to start a bank without the complexity of starting it over the internet.  A lot of these early versions of internet only banks had to pay above market rates to attract deposits because no one knew who or where the bank was and if it was going to be around.  One thing was working for them.  Their fixed costs and human capital costs were low so they could afford to pay a little more to attract the funds.  However, once they started to drop the rates there was no loyalty to institution and the funds left.  Building (and keeping) a lasting relationship with a customer is the key to establishing a long lasting entity.

 

In the marketplace today we are starting to see some services that are beginning to nibble at what we would consider to be the business of your typical retail bank.  For instance, on the liability side you have companies like PayPal (purchased by eBay) which allow businesses and individuals to transfer funds between each other securely.  On a larger scale this could replace DDAs and take the bank out of the equation as the middleman in the transaction.  Next, on the asset side we have new services, I’m not really sure you can call them businesses yet, (Virgin Money, Facebook’s Lending Club, Prosper and Zopa) that allow individuals to go out into the market and request funds for a loan.  This matches lenders and borrowers (P2P).  When you get right down to it this isn’t any different than loan participations, only on a smaller scale.  Banks have used this method to spread their risk on larger, commercial loans for a long time.  Because these loans are participated in small amounts (as little as $50) and the amount of time it takes to accumulate the funds can take a while, these types of loans are guaranteed to be small ($25,000 or less) and for short durations (less than 5 years).  The trust also needs to be built over the web with lenders and borrowers usually never meeting each other.  The lenders are also relying on a credit rating for the borrower gathered by the website service.  In a lot of these cases the borrowers requesting the loans do not have anywhere else to turn due to their credit quality.  This adds another barrier to entry and acceptability because the general consumer will see this in a negative light by only attracting people that can’t get a loan in the traditional manner (i.e. through a bank).  In its current state these services are bound to remain a novelty until they can gain a wider more respectable market.  However small, these examples are steps in the right direction to pure internet only banking. 

 

These are the types of delivery methods in the Web 2.0 environment that the existing “community” bank and credit unions should be looking to exploit for their own business.  Until there is an online source that can both accumulate the funds and then fund the loan requests in a rapid and expedient manner.  There will be no economies of scale to take full advantage of the online banking marketplace.  An existing organization that has been established for any period of time would seem to have a leg up on any new bank, whether internet only or brick and mortar.  Mainly, because they have a historic track record and have built a level of trust with their customers.  It can be extremely difficult to build a financial services company purely over the internet.  The most successful banks need to service their customers in the manner in which the customer is comfortable.

 

However, all banks/credit unions need to start thinking about which methods make the most sense for them.  Banks are anxious to get on board and not miss the boat, but they are also anxious about security (64 percent of InformationWeek Research respondents cite security as an issue to entry).  Organizations are also concerned about losing control of their brand in regards to blogging, etc.  But to this TD Bank’s Su McVey, VP for customer segments and strategy says, “You are going to be talked about anyways, so you may as well have some control over what is being said.”  (Bank Systems & Technology, “Banks are Creating a New Kind of Customer Intimacy With Web 2.0 and Social Networking”, Nov. 1, 2007).

 

We can look at some banking technological developments from the recent past as a way to see how the industry adapts and applies it to the business.  I’m talking about ATM’s and Internet Banking.  Both of which were originally designed to lower the delivery costs of the supplier (banks) but also were sold to customer to improve customer service.  Because when you get right down to it a successful banking business comes down to two things:  customer service and dependability/reputation (a.k.a., trust).

 

ATM’s have been a success almost from the day they were introduced.  At first the ATM service was given away mainly to keep the customer out of the lobby where a teller transaction is much more expensive.  An ATM transaction cost a bank about 25c whereas the typical teller transaction is in dollars.  Today banks charge for ATM transactions if you are not a customer of their bank.  In a lot of cases the customer is also levied a fee by their bank if they use another bank’s (foreign) ATM.  But customers are willing to pay for the convenience (get cash any time and virtually anywhere).  Today, almost no one 40 or younger would consider going into a branch just to get cash.  Once the service is ingrained in the marketplace banking has looked at ways of extracting fee income from it and this is a prime example.

 

I surmise that Internet Banking has been slower to take off due to “ease of use” issues (it requires a computer and sometimes navigating bank websites can be frustrating and time consuming) and concern over online security.  In recent years there have some high profile examples of identity theft and each one of these is a step backward for Internet Banking.  Also, the current format of Internet Banking also requires the customer to be active and pursue the transactions they want to search for. One reason banks want Internet Banking to succeed, besides the low cost of delivery, is the “stickiness” quotient.  Once a customer gets all of their transactions setup and tied in, direct deposits coming in and auto bill pay going out, they are less likely to go to another bank and more likely to use additional products and services from their bank.

 

In my opinion banks need to start down a path of experimenting with products and services for Gen Y [1977-1998] and to start to think about Gen M (Millennials 1999-current) generation.  Now is the best time because of where they are in their life cycle they are just starting to need the services of banks.  At this point both groups (bankers and their younger customers) are at the same point but with complimentary needs. The banks can start as simply as blogging and reaching out through the new delivery methods to educate their potential customers about banking products and services.  They can listen to their customers and develop products for the way they want to bank.  Not guessing and giving them what they think they need and they can respond much quicker than they have in the past.  What says a demand deposit account (DDA) today has to have physical checks?  As Catherine Graeber, VP and principal analyst for Forrester Research says, “You don’t have to convince them (Gen Y) to give up checks’… because they have never used them.” (Nancy Fieg, Bank Systems & Technology, “RDS Special: The Next Generation of Online Banking”, Nov. 18, 2007) .  As you can see banks can start to develop products and services that again are cheaper to deliver.  Everything with the customer’s account can be electronic and delivered to them when they want and with no physical media (i.e. mailed statements).  Again, this is an example of giving the customer the service they want.  The barrier to entry down a Web 2.0 delivery is very low and can be very difficult to quantify anyways.  But as Steve Ellis, EVP of Wells Fargo wholesale solution group says,  “I can’t go out and cook up a dollar value for each collaboration app, I can just tell my boss I know we’ll be better off” for it. (“Wells Fargo Taps Web 2.0”, FinanceTech, Apr. 28, 2007) .  Wells Fargo has started down the education road by creating Stagecoach Island inside SecondLife to reach out to this generation.  Also, the longer an individual has been using a service the less likely they will be to give it up and this is one way of introducing them to their bank.   Today Gen Y make up 15 percent of online households and that number is going to increase to 29 percent by 2011 (Nancy Fieg, Bank Systems & Technology, Nov. 18, 2007) .  Not to mention there are 91 million members of Gen Y compared to 88 million Gen Xers and 77 million baby boomers.  So, the planning for this number of consumers needs to start to be addressed.   Obviously, as time goes by after new delivery methods have been developed and embraced by the market the older products (physical checks) should start to disappear.  (When was the last time you heard of a Christmas Club?)  Additionally, this means the influence of other generations (and the products they require (checks, etc.)) should decrease.  If a customer can make deposits, open a CD, pay bills, as well as apply for a loan online why would they even consider going into a branch, Safe Deposit? At this point, a combination of existing and new, Web 2.0, delivery methods appears to be in order.  Some sort of transition will probably need to take place

 

Today one of the few reasons a customer would need to go to a branch is to deposit a physical check.  But even that is starting to go by the wayside.  Customer online check scanning is being offered by some banks.  Currently it is mostly to their commercial customers (Cardinal Bank (DC area), Columbia Bank (MD), 1^st National Bank of AZ, Commerce Bank (MO), M&T Bank, Associated Bank (WI), and First Bank & Trust (LA) to name a few) but some are even offering the service to individuals (United Bank (WI) and USAA).  This is another example of a service taken out of the branch.

 

After both the institution and the customer have had a chance to build a relationship through education.  The next step is to make the banking website more inviting for this generation (and everyone else for that matter).  Why not have a fully customizable customer homepage built with mashup technology?   Where, their page is designed with that customer’s account information and services that they use most often.  (Gen Y is used to doing this with Facebook today.)  There can even be logic (such as what Amazon uses) that makes recommendations for products that a customer might want or need based on their history and activity in their account.  Also, instead of making the customers have to go to the website all the time.  Why can’t an RSS feed push information, based on criteria set by the customer, to the customer?  If the customer finds that this website is actually useful they are more likely going to look favorably on the institution and want to come back to the website more often, too. 

 

Instead of looking at how income can be extracted from these Web 2.0 methods from the start, banks should look at these opportunities as a cheaper product delivery (the ATM model) and education method.  As time goes on history has shown that income opportunities make themselves apparent as the service matures.  Also, the costs associated with these options are minimal.  So, if one idea doesn’t pan out it can be discontinued and there hasn’t been much wasted expense.

 

Most retail banks and credit unions I have worked with have always been concerned about what other banks are doing.  They don’t want to be the leader but they also don’t want to be the last one to adopt some (any) new product or service based on advanced technology.  In the past this was necessary for smaller institutions because a lot of the technical options required a large capital outlay.  It was better for them to stick to something that they knew worked from the outset so there would be few dollars wasted.  Now, due to lower costs of entry the smart ones don’t have to play follow the leader.  They can sit back, think about what they are trying to accomplish and what direction they need to go and then seek the tools (technology) to support and grow their business. 

 

In conclusion, existing institutions would have a clear advantage with name recognition and trust in marketplace.  They need to quickly embrace the new Web 2.0 delivery options and then evolve their business with them.  It is possible that at some point we will see a purely web based bank emerge.  However, it is unlikely in the near term based on the trust that needs to be built and the recent past unsuccessful examples stated above.  At the present customers are still a little leery of such an option.  As time goes on the older delivery methods can be phased out because the customers that were demanding them have either accepted the new methods as better or they aren’t there to demand the services any longer.  This may take some time but it is better to keep the existing customers happy so they don’t flee rather than anger a whole bunch at once and not have any customers at all.

 

I would be interested in other examples you may have heard about.  Also, how likely do you think a Web 2.0 bank can come online and be successful?