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The Changing Face of Consumer Banking

More than 20 years ago, Bill Gates famously dismissed banks as dinosaurs that would soon be extinct from the modern marketplace.

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More than 20 years ago, Bill Gates famously dismissed banks as dinosaurs that would soon be extinct from the modern marketplace. While our banking system has yet to fossilize, today we have access to many alternatives to traditional banking. Prepaid cards and mobile wallets give us new vehicles in which to store money, and bitcoin, Apple Pay and PayPal, among others, bring new ways to manage our transactions. With this wealth of alternatives to paper cash combined with negligible interest rates, many wonder why we continue to put our money in a bank account.

In the past, there were a number of things to consider when choosing a bank: The location, the interest rate, even your relationship with the bank manager all played a role in the decision-making process. But now, with checks deposited via smartphone and direct deposit, there is rarely a need to visit the teller. Increasingly, benefits such as bill pay, lack of fees and control over money transfers drive people to the online services provided by Chase Bank, Bank of America and Wells Fargo, among others.

Yet these convenient online frameworks are not unique to banks. No matter what you’re looking to do with your money, you can be sure that “there’s an app for that.” Apps like Mint Personal Finance aim to enhance the user experience of managing money. And although apps like Apple Pay and Google Wallet may front as their own platforms, there is usually a bank involved. For example, while Apple could allow you to deposit your paycheck into your iTunes account and use that money to pay bills and purchase groceries using “closed-loop” Apple Pay, currently it would not be easy to set up these capabilities without Apple themselves having a bank account to keep “your” money.

Banking hasn’t disappeared, it has become more transparent

From a consumer perspective, the banking process is certainly undergoing change, but banks may still channel Mark Twain and proclaim that reports of their death are greatly exaggerated. Before writing them off completely, as Gates suggested, we must acknowledge there are still many rules that govern money transfer that will keep them in place as institutions for the foreseeable future and prevent, to some extent, competitors from offering complete alternatives.

Additionally, many skeptics point to our inherent trust as consumers in the banking system, which has prevented us from turning our backs on banks in favor of other technologies.

Rather than the decimation of the banking system, what we have seen mostly (in the developed world, anyway) is the move to “white-label” banking, whereby banks provide the financial capabilities for payment wallets like Google Wallet and Apple Pay. Through this “re-skinning” of a bank’s services, the role of the bank has become transparent to us as consumers. For example, T-Mobile’s Mobile Money product sits atop of Bancorp Bank, but we are really only aware of the T-Mobile brand.

What mobile payments can learn from history

This evolution of bank services is similar to how cars replaced private city rail systems by the end of the 1940s. By 1939, cars were already on their way to becoming a big part of the American consumer’s life, but most transportation was still done by rail. With no affordable alternatives to traveling between point A and point B, rail companies exercised monopolies that often drove ticket prices up.

So when General Motors’ Futurama exhibition at the 1939 World Fair in New York proposed a democratization of travel by expanding the road system and building highways not just between cities, but also within them, the response was so overwhelmingly positive that General Motors embarked on a buying spree of these rail companies. It replaced rail tracks with asphalt roads and car sales exploded. Fast-forward to today, and this democratization of transportation has resulted in crowded freeways and cities reestablishing light-rail-based public transportation systems.

Similarly, innovators in the mobile payments space may try to go around or eliminate the existing banking “rails” or systems to conduct their services. These new roadways into the banking market aim to democratize financial access, but what are the unintended consequences? Is it wise to try to go around the existing “rails” only to have to re-lay them down again later? At the very least, these alternatives and new players are starting a conversation about banking solutions that is critical to have.

Barriers to entry

Today, innovation happens at such an accelerated pace that many governments struggle to keep up and establish level playing fields. In many cases, it is not a lack of standards, but rather that the existing standards have become outdated.

For a current example, consider the regulations around the taxi industry that are being upended by startups like Uber. In London, to be able to drive a taxi, a driver must memorize all the city’s streets. This is known as “The Knowledge.” Such barriers to entry made sense in pre-GPS days in order to provide a desirable service, but with turn-by-turn instructions from GPS navigation systems and centralized traffic control, the “Knowledge” is no longer required to provide an equal level of service, while opening up new, more effective ways to hire a driver and their vehicle.

Banking sees itself in a similar situation — and consumers have led it there. New technologies enable new players who often don’t play by the same rules. However, new players are simultaneously restricted by regulations that were meant for different circumstances and legacy technologies.

But are we really ready for traditional banking to be replaced by a wider variety of financial vehicles? How much new and changed regulation is needed to protect consumers, ensure fairness, promote growth rather than stunt it and, especially for banks, ensure that security and stability are increased or preserved?

Our use of personal technology is prompting the change in the traditional banking landscape. The smart and successful companies and the companies that will win in the long term will be ones that follow us in our behaviors. Change is inevitable, but we are not adrift and rudderless in its current. There will be changes to the consumer banking industry. We know this is coming. And we must not surrender the ability to determine a thoughtful, visionary and level playing field where we predict and address long-term consequences.


Tiago Soromenho is vice president of experience architecture at mobile payments company Mozido. Reach him @Mozido.

This article originally appeared on Recode.net.