Barbarians at the Gate: The Coming Disruption of Retail Banking
How Prepaid Cards Enhanced with Mobile Delivery Create a New Competitive Paradigm
It can’t be fun being a banking executive these days. Your herd is being thinned, your bonus is under scrutiny, new laws are limiting your business and driving up the complexity of regulatory compliance, and you might take the fall for the Great Recession . Still, real challenges may lie beyond these “road bumps”, in the form of a gathering threat to the foundation of banking: retail deposits. This is no trivial matter. Given the demonstrated limits of securitization, the need to reduce leverage, and the strings attached to government funds, retail deposit are a critical source of funding for the future of any diversified financial services provider.
A little more than a decade ago, Clayton Christensen demonstrated in “The Innovator’s Dilemma” how disruptive innovation comes from the low end of the market with new solutions that address the minimum set of client requirements but offer economics and convenience that can’t be matched by incumbents caught by higher cost structures and expectations of higher margins.
So one has to ponder whether the combination of mobile delivery and general purpose prepaid cards may challenge established retail banking models, with a combination of lower fees, easier access and better service.
For starters, consider the fact that the largest issuer of general prepaid cards in the U.S. is NOT a traditional bank (H&R Block according to Nielsen Research) and the razor thin margins that the likes of Incomm are able to operate with.
Now put prepaid and mobile together and what do you get? A bank in your pocket. Most of us use checking accounts to:
- Receive direct deposits
- Deposit checks
- Pay at merchants with checks or debit cards
- Pay bills (online)
- Withdraw cash at ATMs
Compare that with the functionality offered by a mobilized prepaid accounts:
- Receiving deposits: Done, as proven by the growth of payroll cards from the likes of ADP
- Deposit checks: Done, as was aptly demonstrated by USAA
- Pay at merchants: Done, with your prepaid card
- Pay bills: Done, with a growing number of solutions offered by the likes of Verisign or Aliaswire
- Withdraw cash: Done, potentially impacted by the pricing policies and the surcharges applied by the owners of the ATM, an issue that can be solved with good business development
- And as a bonus the users get their account information everywhere, anytime, without interacting with less than helpful customer service representatives
In short, add a mobile functionality from a smart phone to a prepaid card and you deliver the same level of services that a retail bank branch does for the vast majority of consumers, without the hidden fees. It is disruptive because the prepaid providers cost structure allows them to do business with a set of rules and prices that can be seen as consumer friendly compared to financial institutions, at a time of customer fatigue with the legacy providers. It is not just possible, it is being done. Plastyc a Silicon Valley start-up lead by repeat entrepreneur Patrice Peyret is there. PayPal, Obopay are equally ready and poised to move.
So, what is our weary banking executive to do? Clayton Christensen advises that the best strategy to address a disruptive threat is to set up an entity outside of your core operations to avoid heavy cost structures and bottom line expectations of your existing value chain.
There are plenty of options for banks to choose from. One is to create a separate unit, as Bank One did with Wingspan. There are high start-up costs and risks though especially when starting late. An other option would be to partner with the likes of PayPal, Obopay or Aliaswire who have the platforms and the leaner operating structure. Yet the one that intrigues me the most, would be permitting or even directing Visa and/or MasterCard (over which Issuers still have considerable influence) to set up shop. It would require allowing these networks to interact directly with the consumers, which has historically made financial institutions nervous. But the business would stay in the family so to speak.
Open Prepaid Cards are poised for explosive growth, expecting to top over $300B in the U.S. by 2012. If I were advising Mr. Partridge or Mr. Banga, the designated stewards of the future of their companies, and I believed history could repeat itself, I would recall how Visa’s entry in issuer debit processing allowed it to capture the lion share of the business and consider aggressively pursuing a prepaid operating unit. It could endear Issuers, generate new revenues and shake off the image of being a “credit card company“.
Patrick Gauthier is a senior payment industry executive with 20 years of experience in developing, selling and deploying new technologies for payment and commerce, on a international basis, in private and public companies ranging from start-ups to global organizations.