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Triggering Disruptive Innovation in Retail Banking in the Digital Age

Ignacio Mas's picture

See what a profound transformation the internet is producing in information-based sectors. Newspapers are under threat from online news sources and blogs. These same web destinations are becoming less relevant as people simply lift and filter the information they want using RSS feeds. The music CD is being unbundled as customers buy individual tracks online. These songs get remixed and re-distributed across an ever-growing number of online content repositories. Books are increasingly digitized, and customers can now sample content and search for information across entire libraries.

The internet is a destroyer of digital products but a great creator of new kinds of customer experiences. Power has shifted to users: it’s no longer about the packages of content suppliers want to sell but about the content mash-ups users want to consume. Providers’ best response is to try to extract more customer information with each interaction, and use that to deliver even more relevance and convenience to their customers. Think Google and Apple and Amazon: the new corporate battlefield lies in the control of the user interface and the customer intelligence system that supports it.

Yet there is one information-based sector that seems deaf to the great sucking sound of the internet: banking. What is banking but managing information of who has what financial claims on whom? For banking, the internet truly is still just another channel. Sure, it has added transactional convenience, but has it changed how banks talk to us?

Hardly. Online, banks still push products on their own terms (want a term deposit for 3 or 6 months? well, why can’t I have it due on February 27th, which happens to be my lucky day?). They still insist on my managing a set of accounts (which account do you want to move money from? which account do you want to move money to?) rather than a set of goals (would you like to set aside some money for that motorcycle you wanted to buy?).

Some pure-play internet banks (e.g. ING Direct in the US) have championed online convenience and innovation, but that has tended to focus more on new payment methods. There is now a new breed of ‘virtual banks’ in the US that are showing us that banking in the digital age can be customer-centric, social – and even fun. (Check out the innovators such as SmartyPig, Goalmine and Mint, and the more recent, higher-profile Simple and Movenbank). But for the most part, internet banking sites still look like a virtual point-of-sale terminal. Banks position their products online, rather than engaging customers at the level of their needs, goals and aspirations. Why hasn’t online customer-centric innovation been used as a competitive strategy by mainstream banks?

Along these lines, Colin Mayer of the Saïd Business School at the University of Oxford and I have been researching how we can conceive of new banking experiences for poor people in developing countries using basic mobile phones (see our first paper here). With the growing penetration of mobile phones even in the poorest countries, they are the best shot we have at offering a low-cost banking platform that can work for almost everyone. Moreover, mobile phones offer a level of immediacy that should help in making it a great financial planning tool. On the minus side, mobile phones have very limited user interface, so the service needs to be very simple and highly intuitive.

Our starting point is to present financial services as an extension of payments: in the same way that with M-PESA (a very popular mobile payments system in Kenya) you can send money immediately to someone else, somewhere else, you ought to be able to send money to yourself to be received at a future date. Users can then associate future dates with goals, and commit money to those goals as and when they earn it. In turn, the provider can observe how their clients set and fulfill their goals over time, feed that information into a credit scoring tool, and possibly reward their better clients by advancing money so that they can realize their goals sooner than otherwise.

Mobile phones create an opportunity for banks to interact with customers they have traditionally not known how to serve. With the right service design, banking might finally become relevant and affordable for the majority of the world’s poor.

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Read more about mobile banking at Ignacio's website.

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