Why would I ever quote a line of dialogue from the movie City Slickers, specifically the “one thing” dialogue between the main protagonists Curly and Mitch in the context of a fintech blog? Readers might think I have lost my mind… and they may not be entirely wrong.
The context within which I invoke such colloquial and colorful Hollywood prose is that of banks and more specifically checking accounts.
I just finished reading the “World Class Payments in the UK” report from Payments UK, downloadable here, and encourage all interested in payments to read it. There are a few nuggets in this report. The crux of the report’s argumentation is to push for customer-centric focus when it comes to payments. This can be achieved easily currently as most of the technologies and products to make for a more service oriented experience already exist. The report goes on to advocate for more control over payments, better and richer data and data analytics, better service, 24/7 service, faster and instantaneous payments. All worthy goals. One item that caught my attention is the advocation of third party access to customer data and customer accounts. This would seem to be an innocuous feature. I venture to say it is “THE” feature, no correction, “THE ONE THING” Curly would harp on all day long had he been talking to a banker in City Slickers.
What does ease and instantaneity of payments coupled with third party access to customer data have to do with banks and checking accounts. Surprisingly a lot IMHO.
Banks have an unassailable competitive advantage granted to them by licensing fiat. They are deposit gatherers. Most of these deposits come in the form of amounts sitting in demand deposits, that is checking accounts. These amounts allow banks to enjoy the lowest cost of funding available to any entity in the world. I contend that banks have gone out of their way to make sure these deposits are sticky. One of the way this has been achieved has been through the relative friction anyone encounters when trying to make payments. Another way has been to make it difficult for you to share your account data and meta data. That data sits in your account, within your bank’s guarded walls and is seldom used and mined in an effective manner.
Any initiative that pushes for 24/7 instantaneous payments – in and out of a checking account – weakens the cost of funding advantage of a bank. Any initiative that pushes for as open an access as possible to checking accounts and checking account data by third party service providers weakens the dominant position a bank has on its customers checking accounts. Mind you, this is very material. An important part of a bank’s economics is built on the risk/return profile of a checking account. Any change on the economic return of a checking account will have a material impact on bank returns in the aggregate.
Queue the European Union directive that will mandate/facilitate granting third party access to customer accounts + initiatives such as that of Payments UK + service providers (payments, data and others) piling on at the gates and you have a seminal turning point for the industry. One may argue this to be limited to the UK. I have heard of similar initiatives on third party access in other jurisdictions – Singapore immediately comes to mind. I suspect this will become an unavoidable trend which may prove much more impactful than other fintech trends. I am intrigued and fascinated this potential disruption would come from legislators, regulators and bodies such as Payments UK as opposed to directly from the “technology” world. Innovation can be enabled from different corners I guess.
To be clear, I am not declaring banks defeated, I merely point to checking accounts being central to their economic return profiles and the weakening position they will hold going forward on said accounts. I expect counter measures from banks for sure. I expect them to stick to that ONE THING. Well make it two things really. The first “ONE THING” being the checking account, the second “ONE THING” being how to provide excellent service to their customers around that checking account. Note that service is the operative word here. SERVICE is the future of the industry. They may stick to that ONE THING and view it as a store of value or – think innovation here – as a store of data and identity management?
The checking account wars have just begun.
And if you still are skeptical, then ponder on these two moves:
– Apple just announced a p2p payment solution, do you think banks will like the fact this solution may be linked to a checking account? Read here.
– Western Union announced it is powering Wechat’s p2p remittance solution, read here.