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