Virtual Banking

A Guide to Innovation and Partnering

Dan Schatt

• Publisher: Wiley
• Year: 2014
• Print ISBN:
  9781118742471
• Edition: 1
• eBook ISBN:
  9781118742549
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

Technology is permanently transforming the banking industry, and digital payments are the key

Electronic Payments, Mobile Commerce, and Virtual Banking: A Guide to Innovation, Partnering, and Regulation takes a hands-on approach to competing in the modern banking environment. Former PayPal Head of Financial Innovation Dan Schatt explores the reasons behind the massive consumer migration away from traditional banks, and provides clear, actionable guidance on beating new banking models at their own game. Digital payment is the hottest topic in banking today, and is set to define the future of the industry.

Consumers are rapidly abandoning traditional banks in favor of institutions that are lower-cost and more consumer-centric. Between the pace of financial regulatory reform and the cloud computing revolution, the old banking model is on the fast track to extinction. Electronic Payments, Mobile Commerce, and Virtual Banking provides the information banks need to compete in this new environment, and details the integral implementation actions that will allow them to thrive. The book discusses real-world innovations from banks, non-banks, and up and comers, and the heavy competition from the new outsource bank model. Topics include:

• The changing POS landscape and the need for digital wallet partnerships
• Shifting gears to greenfield market opportunities versus non-profitable markets
• Digital channel best practices for superior customer experience
• When to outsource, and what capabilities to truly own

Case studies including PayPal, Google, Square, Facebook, Twitter, and more illustrate acceleration of innovation through banking partnerships, as well as the mechanics behind banking's biggest, scariest threats. The trick to surviving the paradigm shift is to embody innovation while providing a superior customer proposition. Electronic Payments, Mobile Commerce, and Virtual Banking: A Guide to Innovation, Partnering, and Regulation provides the inside track on managing the shift and dominating the new marketplace.

Chapter 1
Consumer Empowerment Knocking at the Door
How Mobile Is Reshaping Consumer Expectations in Financial and Retail

“The smartphone revolution is underhyped—more people have access to phones than access to running water. We’ve never had anything like this before since the beginning of the planet.”

—Marc Andreessen, Andreessen Horowitz

“Our job is to make mobile the answer to everything.”

—Eric Schmidt, Google

What happens when you equip billions of people with a computer in their pocket? Financial services and commerce will forever be reshaped. There are certain catalytic events that have such a major impact on consumer behavior that the downstream opportunities that come about create change at a much faster rate. Mobile is just such an event. Consumers are rapidly shifting to mobile as their primary computing device, with a staggering 51 percent of their Internet time happening through a smartphone or tablet!¹ Yet we are still in the early stages of more dramatic changes that will come about as a result of the innate software and hardware combinations associated with mobile and tablet devices. The microphone, the camera, low-frequency Bluetooth, and biometrics will all have a significant and dramatic impact for financial institutions. Aman Narian, global head of digital with Standard Chartered Bank, sums up this vast uncharted territory well:

We are at the beginning of the beginning when it comes to mobile . . . we have still not used the hardware and software integration of a mobile phone—voice message tags, talk to your mobile banking app . . . biometrics with touch ID coming to iPhone . . . there is much to do. . . .”²

Aman sums up how much of the banking industry thinks about mobile— as a vast uncharted territory. Consider ING DIRECT Canada (recently renamed Tangerine). Eighteen percent of today’s banking transactions are happening on mobile phones; that number was zero two years ago. More than 12 percent of all money transfers, 18 percent of all bill payments, and 17 percent of e-mail money transfers are now conducted using mobile phones.³

Mobile devices are becoming consumers’ primary computing device, and with that, a new set of possibilities open up for financial institutions interested in capturing new markets. These new markets come about as a result of the unique software and hardware attributes associated with a mobile device.

Customer expectations have skyrocketed now that mobile can bring rich, personalized experiences to any smartphone. And as a result, it’s more important than ever for financial institutions and commerce companies to operate with a “mobile first” mind-set. We are already seeing examples of how users are leveraging their mobile devices to disrupt the traditional retail commerce paradigm in the form of “showrooming.” Consumers will look in physical stores, and then simply look up the item on the mobile phone and order it. The Comscore survey shown in Figure 1.1 helps explain why people are showrooming—72 percent simply find a better price online. Increasingly, retailers that don’t have a mobile presence will lose out to the Amazons of the world, who provide consumers with the ability to scan any item they see, and can facilitate the payment and shipping of the item with one click. Moreover, prior to even stepping foot in a store, most surveys suggest that close to 50 percent of consumers are researching products and services before they buy. As a result of consumers’ using mobile devices to shop in these new ways, they have completely disrupted the traditional retail shopping paradigm. Aside from simply researching products, comparing competitors’ prices, and buying goods from online sellers, consumers expect to review ratings and know their budget and bank balance—all while standing in the aisles of brick-and-mortar locations. Real-time access to products is the one significant competitive advantage physical stores have over digital ones, enabling consumers to head to a local store rather than order online and wait for the item to be delivered in days. Who needs to wait!

Figure 1.1 “Showrooming” Is Driving More Spending Online

Source: Business Insider, Comscore.

This disruption certainly isn’t confined just to physical retailers. Most people can’t remember the last time they were in a bank branch now that you can deposit checks, pay bills, send individuals money, and manage your personal budgets all from the comfort of your mobile phone. As a result, bank branches are going through similar radical changes, as is the overall mobile financial services experience. It’s not just the bank branch that is affected; why go into a bank when you can instantly get approved for credit through your mobile phone?

Next, we’ll discuss some of the models that are being developed to take advantage of the inherent capabilities associated with mobile and how they can ultimately benefit forward-looking financial services providers.

How Mobile Is Changing Consumer Behavior

Globally, we now have more mobile connected devices on earth than people!⁴ As smartphones, data plans, and bandwidth continue to improve, those pocket computers, otherwise known as smartphones, have become a significant way for consumers to interact with the Internet. A few notable statistics from the Pew Research Center on U.S. consumers⁵:

• Sixty-three percent of adult cell owners use their phone to go online, doubling since 2009.
• Forty-four percent of cell owners have slept with their phone next to their bed because they wanted to make sure they didn’t miss any calls, text messages, or other updates during the night.
• Thirty-four percent of cell Internet users go online mostly using their phones, and not using some other device such as a desktop or laptop computer.
• Twenty-nine percent of cell owners describe their cell phone as something they “can’t imagine living without.”
• Twenty-one percent of all adult cell owners now do most of their online browsing using their mobile phone—and not some other device such as a desktop or laptop computer.

Smartphones are expected to account for close to 70 percent of all smart connected device shipments by 2015. Mobile phones are not the only devices changing behavior-tablets are also impacting how consumers and businesses use technology. In fact, as of this writing, it appears that we will see more tablets shipped worldwide than personal computers.⁶ A growing number of consumers are looking at two screens when they’re home, such as watching TV while they use their tablet, and we are seeing a growing number of consumers who watch television and movies on their tablet or mobile phone.⁷

So what do all these statistics tell us? Given the ubiquity of these devices, consumers are entering a world in which transparency, information, and access are a given. Goods and services become commoditized unless the consumer experiences something more, whether it is convenience, loyalty, insight, or service. Banks can’t possibly offer their customers a premium experience with their lending, payments, and deposit products unless they are offered in a way that adds context to the experience. For example, securing a traditional line of credit or bank account requires a fair amount of paperwork and certainly is not a real time. In a world where security and price are table stakes, consumers expect to be able to secure an instant auto loan if they are at a car dealership, pay someone in another country without walking into a branch, and deposit their checks by simply taking a picture of them. Young customers that grew up with a mobile phone in their hand will check the phone as part of their morning routine. Consumers will increasingly look to their mobile devices for insight, and to save time and money. Jack Dorsey, founder of Square, has often referred to design and simplicity as the cornerstones of any good customer experience:

. . . And that’s something we’ve always believed strongly in building our technology, building our product: is that we can fade the technology away, we can fade the mechanics away so that the people can focus on a very human, natural, personal interaction and a very simple exchange.⁸

Those companies that can help with this insight will be the companies worth partnering with!

Mobile Is Blurring the Lines between Digital and Physical

A few years ago, in the developed world, the distinction between e-commerce and commerce was fairly clear. E-commerce related to all those things consumers purchased using their desktop or laptop computer, or whatever device they used to shop online. “Physical” commerce was the art of buying something at a physical location—a retailer with real “brick and mortar,” a cash register, large point-of-sale machinery, PIN pads, card swipers, and receipt printers. This clear distinction has made it easy for the U.S. Department of Commerce to report out the percentage of e-commerce sales that contributes to “total” retail sales. Judging by this measurement, the total impact online commerce has had on the economy seems quite paltry—less than 10 percent of total retail sales.⁹

Over the next few years, it will become very difficult to make this same distinction. Why? People are changing their shopping patterns in physical stores based on their mobile behavior. Purchasing something “online” and “offline” is very hard to judge now that ...

Table of contents

• Cover
• Praise
• Series
• Title Page
• Copyright
• Dedication
• Foreword
• Preface
• Acknowledgments
• Introduction
• Chapter 1: Consumer Empowerment Knocking at the Door
• Chapter 2: Social and Financial Services
• Chapter 3: Connected Financial Commerce
• Chapter 4: Innovating with Big Data and Open Platforms
• Chapter 5: Math-Based Currencies
• Chapter 6: The Smart Pipe
• About the Author
• Index
• End User License Agreement