9 May 2012

Today’s WSJ outlines JPM’s plans to issue a new pre-paid debit card out of their branches. In January I discussed the tremendous impact that WMT/GDOT will have on mass market banking, where I outlined that the Fed is concerned that the bottom 4 deciles of customers are no longer profitable for the big banks.. and there is an exodus. How does the US financial system retain customers in the lower mass? GDOT and WMT believe it is not through the typical branch model. Just as with Tesco in the UK, Retailers are proving to be excellent distributors of banking services.

There has never been a better time to be in prepaid!

This is beyond interchange and plastic, we are beginning to see the early stages of an “overhaul” of what banking (and payments) is. The next 3-5 years will be a period of much experimentation. A few of the active initiatives:

• Retailers as banks
• Retailers constructing their own payment network
• Retail pre-paid products (ex GDOT/WMT)
• Bank’s monetizing data through card linked offers and merchant funded rewards (ex. BankAmeriDeals)
• New Direct Bank models (ex Barclay’s from yesterday’s WSJ)
• Phone/Virtual Wallets

…I could go on…

I apologize in advance if this sounds pompous.. but hey it is my blog.. and I want to give you background on how I came to this perspective. I’ve been very fortunate to have been either on the technology side, or as business head of most new banking models: Worlds First Online Bank – FirstUnion’s Cyberbanking  (1995 see wikipedia), First instant account opening and funding US (Wachovia 2002), First International Account opening and funding (Citi UK – 2006), Google Wallet….

The change happening today is many orders of magnitude more complex: consumer value propositions, distribution, technology (ex NFC), regulatory (… for example how do you accomplish KYC in a GPR card sold at a retailer… or mobile operator).

Where do I invest? Its all based upon 2 simple questions:

#1 what value do you get out of your Bank today (compared with alternatives)?

#2 who has a brand Consumers trust?

Most retail banks have rested on very stale product constructs. Why do we have a checking account, savings account and card… with fees on each? Why not have one account where I pay interest if I owe money.. and earn interest if I have a positive balance? Why must I pay $25 for a wire at the branch when it costs the bank $0.05 with the fed? The fee and service nightmare of understanding sweeps, lending, payments, cards, savings, checking, … is just insane. Even the simple products are not simple (particularly when it comes to understanding fees). I’m no fan of the CPFB.. but the Bank’s brought this on themselves… there is real consumer anger.. all of which damages brand and trust. Which of course makes the ground more fertile for competing schemes.

As the WSJ article alluded to… banks actually want the bottom 40% of their customer base to leave.. they are no longer profitable..  This is what the Fed is concerned about.. where do they go?  Most concerning is where will the liquidity go (for non bankers liquidity is the Liability or balance of funds that is stored in its accounts, Assets are loans made by the Bank). Liquidity impacts capital ratios, and lending..  For example, many of you have read my notes on Kenya’s MPESA, that evolved from nothing to holding 10% of Kenya’s GDP in a single settlement account in just over 3 yrs. Money in a settlement account is not available for lending (typically), this was a central point of concern for Kenya’s central bank and other emerging markets as bank liquidity ratios in emerging markets are very compressed.  In the US, major banks are not at all concerned with liquidity… in fact many would  say that they are overly liquid and would like to see the run off. The problem for US banks is Asset quality (qualified lending opportunities).

Wow.. these are exciting times. Companies to watch: retailer friendly plays, as this is where the distribution and data sit.

BTW.. if you agree with any of this.. how on earth can bank’s continue to justify stand alone bank branches.. ? something must change there soon…