Food for New Years Thought: The Future of Banking

Every consultant worth his salt is busy trying to write something prescient on the future business model for banks. GLG Research recently published a report calling out the following key parameters, with a focus on retail banking:

1. Peer-to-Peer (P2P) Lending: An advanced technology that eliminates middlemen and directly connects borrowers and lenders.

2. Prepaid General Purpose Reloadable (GPR) cards: In return for modest commissions, a global agency network of convenience stores and retailers are now enabling cards to be “loaded” with cash. When equipped with remote deposit check capture, direct deposit, bill payment and ancillary credit, savings and investment accounts, these cards make traditional bank branching redundant. eWallets such as those touted by ISIS, Google, Visa, Amex, Paypal and FaceCash are the offspring of GPR built on the same infrastructure; similar economics but a different, arguably more convenient, access device.

3. Social Media: Social media like Facebook and LinkedIn can offer insight into customer behavior that can be applied to enhance customer acquisition, retention, and even underwriting (http://www.freepatentsonline.com/20110112957.pdf).

Banks which are early movers in this area have a great opportunity to reverse the post-2007 profitability decline. Success, in my opinion, will depend on three things:

• Getting it done quickly
• Getting the customer experience right
• Getting the risk management right

Those aims are, in many areas, conflicting. A balancing act is required. Wading too timidly into these areas might cause impatient "early adopter" customers to defect, or at least decrease their activity level. Making a big splash in these areas without consideration of risk factors invites the wrong kind of customers and is sure to balloon losses.

Critical to all three of these emerging trends are the "Three Risk-Management A's of Next-Generation Banking"

1. Analytics: Collecting the necessary data about behavior as well as customer preferences to objectively understand and address behavior in a consolidated, risk-based, customer-centric manner 
2. Authorization: Making an informed, risk-based decision about what the bank allows the customer to do
3. Authentication: Making sure the transaction is being done by the customer, not a fraudster

Periodically on this blog, I will individually look at these trends, highlighting the risk implications for the future banking business model.