Here’s a quick recap to catch you up: In my first post, I argued that “banking innovation” is essentially an oxymoron. The small amount of innovation in B2B banking has focused on incremental improvements to existing products and processes. In the second post, I asserted that the relevance of B2B banking innovation from within the industry has been minimal. The big ideas occurred elsewhere and were subsequently applied to banking.
What does this mean for the future of innovation for banking and the evolution of B2B financial flows? Here are some thoughts.
Generally, banking is still an enormous industry, with incomes above those of other industries; therefore it will continue to attract newcomers. But how will they enter the market? Generally speaking, they can go through one of the following three doors:
1. They may have a strong presence in a similar market that they can leverage
2. They may offer better banking products
3. They may do something truly innovative
I consider Apple and PayPal as examples of companies that used the first door to enter into the payments market. Today, I still see obvious candidates that could be duplicating PayPal’s success using any of the three doors:
1. Leveraging the current market: M-PESA. M-PESA built a presence in mobile payments and mobile loans, expanding into mobile banking in Africa and other regions with an underdeveloped banking network or specific market situations. Today, M-PESA is no threat to banks in the Triade, but imagine what a BNP Paribas, a Commerzbank, or a local savings bank in Belgium will look like ten years from now, after M-PESA has become a de-facto standard in say 25 quickly growing countries, still working from a much lower cost base.
2. Offering better banking products: Large corporations. Almost all banks today still work in a nine-to-five mode, while corporate treasurers use a follow-the-sun approach (or would do so, if the bank allowed them). Big corporations have reacted to this by tapping financial markets directly or through their own banks, and operating ERP and payments systems 24/7. In short, they can provide the services banks cannot. Are they likely to bear the costs of these technologies just for their own business eternally?
3. Innovative financing: Inter-corporate markets. How about Apple going into corporate finance? Outsourcing innovation is already commonplace. One can go to a marketplace and place a request for research or development; one can establish a platform where smaller companies can provide services to specific markets driving new services; or one can just use suppliers to provide new products and services. If you are at Apple, and you do all this already and you sell the tools with it, and you sit on a pile of cash, and you are commuting an hour every day, you must really love that radio program to not think of investing that liquidity.
So there are the contenders, and some ideas they might use. Let us also look at products regardless of who could provide them. A change in the product offering is probably the most intuitive way one can take enter a market—just offer something better (or cheaper, but that is not my focus today). I believe the full product line of banks is outdated, and ready for disruption, and there has been enough evidence in the market to make me believe someone will jump on this:
1. Private investment and asset management. Take a look at just a few of the ideas outlined in Robert Shiller’s books. I personally am not convinced of his mortgage investment ideas, since I believe personal incentives, issues in managing liquidity and measurement issues on micro level will make too heavy a burden on the products he envisions to make housing markets more efficient. But the thought that a person’s assets are mainly the capability (and willingness) to earn an income, and only to a smaller degree the financial assets like shares, houses, and cars, is proven, true, and utterly unused. Family offices think a little in these terms, but for the wrong people. For ordinary people still living on their labor, how can one dare to talk about wealth, discuss distribution between stocks and interest bearing vehicles, and not think of how to invest to preserve the health of the person, keep his/her skills up-to-date, or find a better paid job? I think we will laugh at this 10 years from now.
2. Character-based credit. John Pierpont Morgan is said to have confirmed that the key decision point for providing credit is character. It served him well; it is the mantra of venture capital companies; it is well known in much-bashed economic theory; it is approximated in decisions of the insurance industry, and completely ignored in credit decisions. Someone will tap that market, believe me.
3. Here comes Traxpay. Corporate payments are still done in batch mode at single intervals, with inconsistent message formats, and no chance for participants to communicate if things go wrong, let alone open a discussion between the accounts receivables/accounts payables department on one hand, and functional experts on the other. The reason for this can be found in the existing payment systems, and the hurdles of transforming the entire banking system. Technically, moving a few characters is as hard in payments as it is in emails. Technically, sending pictures in Facebook is no more difficult than in Traxpay. Technically, a “reply to a payment” is already implemented. If you don’t believe it, contact us at firstname.lastname@example.org. Or if you see online, real-time B2B payments anywhere else, or dispute the value of it, please contact me at email@example.com and tell me about it.