Where Is the Innovation?
This article was originally published on June 2, 2014 via the BankThink section of the American Banker website
Banks have always been quick to integrate new technology. Since the advent of the personal computer, they have made excellent use of this technology internally and externally. The PC and Internet eras have produced successful customer-facing products and services. Most basic retail banking no longer needs to be conducted in a branch. Retail deposit accounts can be opened and closed without the customer ever setting foot inside a bank. Most checks can be deposited via a smartphone.
Despite these successes, banks have failed to deliver innovation fueled by new technology to their retail deposit customers. The digital product and service revolution has yet to happen in the banking industry.
Part of the reason is retail deposit banking is still based on centuries-old checking and savings products. There are certificates of deposit, safe deposit boxes, and other ancillary products and services that have all been around for decades. Where is the digital revolution for these? Viewing the balance of a checking account on a connected device instead of manually tracking the balance in a checkbook register is not innovation. Neither is paying bills with a bank-provided online bill-pay service. These just provide more efficient access to the old products.
Much has been written about innovation from nonbank entities. The companies that provide peer-to-peer (P2P) lending, like Prosper or the Lending Club, are considered innovators. P2P lending is another centuries-old practice that was originally between family and friends. These companies use technology to make P2P available to anyone who wants to get a loan or use their funds to lend to others. They are proof that technology and innovative thinking can create new retail banking opportunities.
What about the retail deposit products offered by the neo-banks, such as Moven, Simple or T-Mobile’s ‘Mobile Money’? They provide a better customer service experience and user interface. They make better use of banking data than most banks. But the neo-banks are not innovating anything in banking, they are just doing it better.
One example of deposit product innovation is technology that provides FDIC insurance for one customer account for tens of millions of dollars. Promontory Interfinancial Network, LLC has two products, Insured Cash Sweep and Certificate of Deposit Account Registry Service, that provide this service to approximately 3,000 banks. Here is how: A client opens just one account at one bank and the service takes care of all the operational work of creating the other FDIC insured accounts. The founders of this company saw a problem and solved it using technology driven by innovative thinking.
Another example of technology that banks and bank core providers use provides business or investment customers with multiple sweep type accounts that automatically move funds based on pre-defined criteria between accounts to cover disbursements or to move excess checking balances into multiple other checking accounts or interest bearing accounts. These are typically known as zero / target balance accounts and money market sweep accounts.
Despite such small steps, innovative thinking in retail deposit products, particularly checking and savings accounts, is long overdue. Why? It’s not a regulation problem as those challenges can be resolved. It is not a problem that gets solved with application programming interfaces. The banking industry needs to break with old deposit banking product conventions and re-boot banking. It is our industry and we are the ones best equipped to make it better. We now have more help available via the technology industry than any other time in history. There are FinTech communities in Silicon Alley, Silicon Bridge, Silicon Prairie and Silicon Valley.
One way to re-boot retail checking and savings accounts is to emulate what others have done, use technology to improve the aging product. The systems that drive business zero balance and sweep accounts could be adopted for retail customers to provide a better banking product set. Instead of a customer opening a checking account for payments and a savings or money market account for savings, a customer could open one master account. Depending on each consumer’s profile, multiple child accounts would be opened by the system. For example, a customer with a basic bank account could receive child accounts for bill pay, debit card, emergency savings, a defined savings goal, and excess cash. Each pay day, the consumer’s pay would be deposited into the master account. The system would then populate payment accounts with enough money to cover expected bills or debt transactions. The savings accounts would increase by a pre-defined percentage. A learning algorithm could analyze past transaction history and modify the transfer of funds based on real-time analysis to automatically manage the flow of the customer’s funds between accounts. The savings models would dynamically increase or decrease savings based on the real-time analysis of each customer’s cash flow.
This would allow banks to increase the duration of the retail balances earmarked for payments and increase the balances saved for their customers. The increased average deposits could lower the need for alternative pricier funding for loans.
The road to re-booting retail deposit banking starts with modernizing the basic checking and savings account and by thinking differently, as Apple Computer did many years ago when it told us to “think different.”