Imagine my glee this morning when I came across two of my favourite bloggers agreeing on something where I totally disagree! [disclosure; I have a vested interest in the subject matter – more on that later]
James says:
In fact, as far as I can tell, the difference between a web financial services company that is driven to get profits by shareholders and a bank that is driven to get profits by shareholders is practically nil.
Source: Bankervision
And Ron picks up on the topic, bringing in the Credit Unions:
Bottom line: CUs can’t rely on messaging and positioning statements to improve their competitiveness.
Source: MarketingROI
Where do I start! First of all, Banking’s dirty little secret is that the real money is made on deposits, and low cost free deposits especially. This fact plays through into the broker side of Banks too. When you look under the covers, significant money in brokerage is made on customers deposits in transit, or simply un-invested.
Caveat emptor you may say … absolutely, but lets not kid ourselves that Banks are do gooders. By the same token of course Web 2.0 financial companies such as those mentioned (Zopa, Prosper, Boober) are all in business to make money.
But there is one difference, that is worth noting. Web 2.0 companies, whether they realise it or not, reduce the cycle involved in creating profitability. I am not an Economist, but in simple terms, the GDP of the industry is reduced. There are less money movements required to produce the desired result.
The Credit Union point is interesting. I see Credit Unions as leading the charge in innovation, and have blogged extensively on that. Granted not all of them, but in aggregate Credit Unions exhibit more Web 2.0 characteristics than Banks. In that sense they are expressing strategy, and not simply positioning statements.
Going back to Web 2.0 companies, some are only in it for the ‘exit’, but the common thread that I see in talking to people in the industry, is that they have a genuine belief in their business model, that is not only grounded in financials, but contains an honest attempt to redefine business relationships in ways that reduces the friction, and thus the costs, involved in old world processes.
Financials:
Its worth restating the obvious – the web is efficient, and the combination of social applications, and financial needs, produces an efficiency that does not require the same overhead. The financial metrics which are used to measure Banks will not apply to these Web 2.0 companies. The reality is that by using the efficiency of numbers in a relatively small web application they can produce enough based on flat rate pricing that will satisfy investors yet dramatically undercut the Banks. Banks have legacy costs (technology, real estate, processes, people) that is largely fixed. High spreads are essential to continue.
So the pricing mechanism in a these Web 2.0 companies, as with Banks, is designed on simple economic need of the company. With the virtual elimination of costly processes, the pricing can be reduced to that which is required to produce an economic model at the lower cost base.
Public Relations:
The mention of consumer backlash is interesting. I look at how Google, Jet Blue, WordPress, Wesabe and others have handled negative press, and compare that to how Banks, and even Microsoft handle it.
The difference to me lies in the immediacy, iterative, natural and open response mechanisms used to handle situations.
Of course we are going through a period of disruption, and change is uncomfortable. During these time, different marketing approaches will be used to get attention to what is a new business model, and that’s necessary in order to ensure the message gets out. I would say though, that its a real message grounded in fact. I found this on the ING (one of the worlds largest bank and insurance companies).
This means that ING Bank’s cost of doing business is much less than its competitors’. And when ING Bank saves, you save – it’s that simple.
Let the debate begin!
[disclosure] I will be blogging more on this topic, here beginning next week, and going forward [/disclosure]
Bankwatch 
I could write a book in response to this post. But I won’t. What I will do is try to boil my thoughts down to a few points:
1) Web 2.0 companies are no different than any other type of company. If they are to survive and thrive, must fill a need. This is an UNALTERABLE law of economics. If you need proof, look at the list of dot coms that aren’t around anymore. It doesn’t matter one bit that what these firms do is on the Internet, that they utilize new emerging technologies, or that they hold hands, sing Cumbaya and create social networks. By finding and fulfilling unmet needs, they increase — not decrease — GDP. They create NEW profits.
2) Please provide concrete examples of the “innovations” that you have seen CU leading the charge in. While CU may “exhibit more Web 2.0 characteristics than banks”, so what? Not only is that not “innovation”, it might not (and so far hasn’t) made much difference in terms of market share, sales, and profitability. Which are STILL the measures of success. CUs are not-for-profit, NOT charities.
3) For me, the common thread across JetBlue, WordPress, and credit unions is SINCERITY. It’s a fundamentally human trait… and consumers want to do business with firms that exhibit this trait. Large businesses have spent the past 60 years automating, engineering and then reengineering, etc. and have lost this trait. A trait that is, for many people, a necessary condition to having a relationship — whether its a relationship with another person or a relationship with a company, product, or brand. If that’s what you’re calling “Web 2.0” fine, but slapping a label on something doesn’t make it so (remember all those companies that added “dot com” to their name back in the ’97-’99 time frame?).
ok, Ron…. take a breath
No challenges there Ron. Re Credit Unions, I am going to gather together those that I have seen, and do in one post.
You know, when I am talking to banks day to day, I often make the point that financial exchanges, such as Zopa, are a *better* model than the traditional banks for all the reasons you describe. There’s no doubt in my mind that the economics are changing for some classes of product that banks traditionally have been leaders in.
That said, I do have a strong suspicion that having a better business model doesn’t make the new players immune from the kind of corporate arrogance that makes people hate banks so much. Paypal anyone?
You have only to look at the press Zopa generates to see this. They came out in the last few weeks with a study – based on earnings reports from banks – suggesting that banks were making in the order of 500 pounds per household nationally in the UK. Theme? Banks are bad. In fact, Zopa is by far the worst of the new lot in this respect.
Imagine what would happen if a bank started a press campaign around the “unreasonable fees” of P2P companies… not a very sensible positioning strategy.
Anyway, Colin, this was a super-interesting post. Thankyou.
And congratultions on the new venture you point to. I think you indicated somewhere previously you’re consulting on it? Can’t wait to see how it all works and what insights you’ve brought to community based lending.
Thanks James … and your point re “imagine what would happen if a bank started a press campaign around the “unreasonable fees” of P2P companies” is very well taken.
Pure negative campaigning as ones first position is disingenuous at best.
James touches on what, for me, is the most important point in this discussion: Is the Web 2.0 companies’ business model REALLY better?
This is at the root of the problem for the big banks — their business model isn’t scaling, and isn’t aligned. The vagaries of the economy make it difficult for banks to sustain growth and profitability through the spread, so they turn to fees. And generate fees NOT necessarily through value added services, but through penalties.
For firms like Wesabe, Zopa, and Prosper, their time of reckoning will come. In fact, let’s take a look back at what happened to Mr. Larsen’s (of Prosper) last venture — oh yes, that’s right — E-LOAN sold itself to one of the big bad banks.
Zopa and Prosper prosper today (pun intended) because they fill a need — NOT because they’re on the Web, and not because they’re a social network. People need money, and can’t get it from the big banks, for whatever reason. The big banks (and credit unions) could put Prosper practically out of business tomorrow if they wanted to. But they can’t — not because they’re big and bad, but because of the constraints of their business models.
It seems to me that these are disruptive times, and an eventual purchase by a Bank is quite a possibility. The key for me is that Banks see the disruption going on around them, and do not know how to deal with it. Their cost structures are embedded in the old model.
This happened with Mutual Funds long before internet. That product disruption was rounded out when Banks bought up fund companies.
I think in times of disruption its normal to see layers being peeled off, loans and deposits in the case of Prosper/ Zopa, and as to the eventual outcome, we will see.
Lastly, I disagree that its because they are on the web. The basic disrupter here is the web. Prosper cannot set up an auction exchange for loans without the web. Banks cannot enter that space easily without the usual concerns for canabilism, and concern for employees jobs.
However, once the disruption has occurred, all bets are off for the next stage.