Some challenges for banking technology at the edge of innovation

Here's three challenges for banking technology at the edge of innovation. As always, it's instructive to take and an end consumer focus in reflecting on this issue:

• Identity anarchy, or: how do we credibly establish identity in the absence of face-to-face contact?
• Mobility fragility, or: the rise and rise of mobile devices and their inherently heterogeneous environments.
• Two-point-oh fatigue, or: let’s party like its 1999.

Firstly, as more and more transactions move to electronic channels, banks have an increasingly difficult problem in credibly establishing the identity of the person at the other end of the conversation. And this problem is not limited to banks because the end consumer too, needs reassurance about who they think they are dealing with.

Secondly, if the trend to motility manifests as I think it will, then there will be one characteristic of the technology landscape that will be very different from today’s PC operating system monoculture. The mobile handset market is vastly more diverse than the current PC domain, and this has two implications. Firstly, the diversity of platforms means that there will be more holes for attackers to chase and exploit (potentially a unique set for each handset and operating system combination). Secondly, because the lifecycle of a mobile handset is so short, vulnerabilities are often not patched because it is cheaper, easier and/or quicker to bring out a new model. The result of these factors is that if we think we have a problem with endpoint security today, then we are potentially in for a whole lot more trouble in the future.

Finally, there is some amazing promise in the notions of Web2.0; however there is also a very real risk of it all bursting in an explosion of social networking sites poaching each others members. This time around it seems driven by acquisitions not IPOs, but some of the same bells are ringing. How many times can we attach “2.0” to something before people start to lose interest?

I think that the solution to the first problem lays in a credible, universally accepted, portable, cheap, effective, secure, and privacy respecting digital identity. I know from personal experience that this is not at all an easy thing to achieve; however, there are some technologies in this space that look promising right now. A solution for the second problem becomes a whole lot easier if we stand back and forget for a moment that the mobile device is a phone, and consider that is just a PC with a small screen. In my view, it does not make sense to build a whole new banking platform and delivery capability designed specifically (and only) for mobile phones. It’s expensive, non-standard, time consuming, and prone to error and obsolescence. What makes more sense to me is to take the existing online channel and make sure that it can be viewed on a constrained form factor device, over IP on a 3G (or 4G) mobile network. Although these capabilities are beyond the average device today, I firmly believe that it will be the default capability of devices for the majority of consumers in the near future. As we have seen (hype aside) the iPhone has raised the bar by bringing a new brand of unconstrained web browsing to handheld devices so we can be sure that other manufacturers will follow suit.

Finally, I’m not sure there is a solution to the problem of “two-point-o fatigue”. As anyone who went through TechBubble1.0 can attest, it was a pretty fun time – right up until the very end. There’s a lot of activity in this space at the moment, both in terms of innovations such as Prosper.com, Zopa.com and Kiva.org, and in terms of acquisitions. For example, I recently read [1] that FaceBook turned down a US$1b acquisition, making it public that it is only entertaining offers in the US$10b price range (I just hope they don’t turn out to be another PointCast).

M@

References
[1] "FaceBook founder ‘stole our idea’", Sydney Morning Herald, 25-July-2007

Musing on the outlook for banking technology in 2008

I think it’s always interesting to think about how technology is changing from the perspective of the end consumer. In that light, I can see two clear trends that will influence innovations in banking technology over the next year or so, particularly in the way consumers will interact with financial institutions. These are:

• Motility, and
• Sociability

Although there are certainly other trends, I pick these two specifically because they fit together well to exemplify what some have called “Banking 2.0” (even if the “two-point-o” moniker has become a little hackneyed).

Motility
I chose the word motility intentionally (from the Latin motus) because it implies spontaneity and revolt, as opposed to just simply moving. Mobile devices are not just coming of age; they are supplanting traditional desktop PCs as the access mechanism of choice. Depending on whose numbers you believe, there’s already nearly an order of magnitude more new phones purchased each year than new PCs, and the trend is increasing. People also tend to replace their mobile handset once every 12 months or so, as opposed to 24 months for a PC, so the likelihood is that if a consumer does not currently have a state of the art phone, they probably will have one with those capabilities next year. The bottom line here is that in 5 years time, I think most people will be using a mobile device, and not their desktop PC, as the preferred platform to interact with their bank.

However, there is an embedded contradiction in the above trend, characterised by an article I read in the SMH [1] the other day. This study showed that the use of e-mail and text messaging by Gen-Y’s and Gen-Nexters is actually decreasing in favour of the use of social networking sites such as Facebook and MySpace. Apparently texting is “sooooo 2006”. You can already interact in a rudimentary way with Facebook and MySpace from a phone – imagine what will happen when the next generation of those applications emerges.

Sociability
Which brings me to sociability. In the financial services space, the best examples of sociability that I have seen so far are the “social lending” sites like Zopa.com and Prosper.com. I’m not sure which one came first, but in each case their basic premise is that they put lenders and borrowers directly in contact with each other, bypassing traditional financial institutions. Borrowers list a request, indicating how they intend the use the money, along with some personal information to establish credibility. Lenders don’t invest in a single borrower but rather distribute their capital across a number of requests, effectively spreading the risk. Its portfolio theory meets social networking. Over time, borrowers establish a credit rating by successfully paying back their loans, and they can also form groups that bestow credibility on members by virtue of their associations.

Taking this idea one step further, organisations like Kiva.org and Opportunity.org are delivering micro-finance to the third world, allowing desktop philanthropists from the developed world to invest in developing world entrepreneurs.

Banking 2.0
And it’s at the confluence of motility and sociability that I can see some amazing opportunities for innovation. Is social lending a new way to drive originations for traditional lenders? Will this have an impact on unsecured lending and credit cards? Maybe it’s a new asset class for investors looking for an interesting combination of financial and philanthropic returns? Or perhaps it’s a combination of all of the above? Who knows, but it is fertile ground.

M@

References
[1] "For SMS, the days are numbered", Sydney Morning Herald 27-Sep-2007

Products versus Customers

It strikes me that there is a really deep flaw in the way traditional core banking systems model the relationship between an institution and the end consumer. Often these systems are product-based, with the customer’s relationship with the bank modelled as an artefact of the origination process. I have heard this described as “inverting the customer/product model”. To me the standard product-based approach is basically backwards. I should be able to have a relationship with the bank that is independent of any particular product. Of course this is changing with modern CRM systems, but the fact remains that there is a huge underlying legacy of core banking systems that seem to have the basic abstraction wrong.

M@