Banking Is Not A Technology Business

It’s an interesting paradox. On one hand, a bank is dead in the water, not only if its technology isn’t working properly, but if it doesn’t have great technology-supported processes and services.

If you don’t believe this, get Bank of America to shut down all of its systems for ONE hour. Panic, the likes of which you’ve never seen, would ensue.

But banking isn’t a technology business. It’s a service business. A business whose services are often packaged as technology-enabled and technology-delivered “products”, but a service business nonetheless.

This might be patently obvious to you.

But it’s not uncommon to find articles about Mint.com or — more recently — about BankSimple on sites like TechCrunch. I never understand why TechCrunch writes about firms that are fundamentally financial services firms, not technology firms.

Wait, that’s a lie. I do understand why: It’s because 1) TechCrunch doesn’t know the difference between a technology company and a technology-enabled financial services company, and 2) Mint and BankSimple have a coolness factor that play into the site’s audience.

In the larger scheme of things, it’s no big deal that TechCrunch doesn’t get the difference. But it is a big deal if a Mint.com or BankSimple doesn’t get it.

I’m not worried about Mint. Its part of Intuit now, and they get it.

BankSimple I’m not too sure about it. I have to admit, though, that it’s a bit unfair of me to share that concern, since I haven’t spoken to anyone at BankSimple.

I don’t harbor any delusions that only someone with experience in a particular industry could start a successful business in that industry, but judging from what BankSimple has posted on its website….

“BankSimple is an easy, intuitive, and social bank for people who appreciate simple online services. Unlike other banks, we don’t trap you with confusing products nor do we charge any hidden fees. No overdraft fees. We use sophisticated analytics to help you better manage your finances by providing you a individualized service, catered to your needs and goals.”

….and from what ex-Twitter exec Alex Payne has written on his blog….

“A bank that doesn’t gouge you with fees.
A bank that doesn’t treat you like crap.
A bank that cares about design, but gets out of your way.
A bank that puts your money to work automatically.
A bank that’s building a platform for the future of personal finance.”

….then I can only wonder: Do these guys really get how hard it is to be a good “bank”?

I put bank in quotes, because credit unions aren’t banks. And they don’t “treat you like crap.” And they know DAMN WELL how hard it is to compete in the financial services industry.

Technology that’s well-designed, gets out of your way, yada yada yada is all well and fine. But banking is a service business, folks.

23 thoughts on “Banking Is Not A Technology Business

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  2. Technology is a tool–albeit a critical tool–but just a tool. It’s no different than the hammer in a carpenter’s toolbelt: hammers don’t build houses, but you can’t really build a house without a hammer.

    I don’t believe technology will ever be the savior of banking. It can increase a bank’s competitive advantage, for sure. But it can never become the bank itself.

    I was having a conversation yesterday with a colleague, telling him that I would love to see a non-technical version of Finnovate: one in which companies selling new business models, ideas and paradigms are presenting….not just sharing their new technologies.

  3. I agree with your post but I think it is difficult to find a consumer technology business that would qualify as technology only. Most of them address a pain point or need through a technology enabled service (Facebook or Twitter for example).

    The banking industry is not an easy entry business, I agree with you its specificities makes it even one of the most difficult one. But the growing number of startups I see in that field have a service premise and use technology to address it. Will a lot fail? Most likely yes because it is a difficult market to enter but I hope it will participate in giving new perspectives on how the banking industry is working and changing.

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  5. A couple obvious statements: While there are many VC-backed technology companies, is there such a thing about a technology business anyway? Any successful business is about service, particularly those who sell technologies.

    What I think is wrong about what you read about BankSimple is that their copy seems to be selling to alpha geeks. Who else cares about “sophisticated analytics” or being a customer of a bank which is a “platform”? This will have to eventually change. but I’m confident that BankSimple understands that their success depends on using technology to make their experience a convenient one for a large segment of banking customers.

    Yet, focusing on geeks is not an uncommon strategy for startup firms to target the geeky crowd first with a top technology-driven user experience then expand beyond, it’s almost the blueprint model.

    I don’t know BankSimple, but I think it would be fair, as you wrote yourself, to talk to them beforehand.

  6. OK, OK. So there are no “technology” companies. Those comments are reacting too much to the title of the blog post and not the points of the post, that, mea culpa, I probably didn’t make clearly enough.

    Being optimistic as an entrepreneur is a good trait. Being clueless isn’t. Being clueless as to how you’re going to compete, how you’re going to make money, and what the market needs and what you REALLY need to do satisfy the market’s needs isn’t a particularly great road to success.

    Which isn’t to say that you might not develop some really cool technology which some other firm might find valuable and pay you for to put you out of your misery (and make you rich).

    There’s this attitude out there — that I think gets fostered by the likes of a TechCrunch — that goes something like: “incumbents SUCK, and the new guard of technology-driven entrepreneurs are going to come in and change everything”.

    Makes for great reading, no doubt. And fuels plenty of VCs. Also makes for a lot of unfulfilled dreams.

    Gotta go: Tonite I’m gonna party like it’s 1999.

  7. Declaring an interest, I am an adviser who has worked with Zopa.com – the pioneering and now highly successful peer-to-peer lender – for many years.

    Just wanted to say that Zopa is a very valuable case study in this important field (but not sure about the importance of the debate about what badge to stick on these new startups). The deeply-rooted reluctance of the incumbant banks to treat their customers with anything better than contempt, despite the GDP-sized bailouts they’ve had from those very same people, underlines the importance of new competition, whether it calls itself technology or customer or anything-else-led. The OFT’s announcement this week that it is going to review the barriers to entry for new banks and competition for the banks is excellent news.

    Zopa’s experience has been that technology has been a crucial facilitator; it couldn’t have done what it has without it, and how it can knock the banks’ best offers for six is very dependent on creating and using technology the banks envy. BUT, equally crucial is offering a uniquely powerful service to its members – differentiatied, fast, friendly, transparent and one that truly works to the members’ considerable benefit relative to the banks. All of this has been essential to build the TRUST that a new player must create if it is to penetrate the caution-fueled world of finance. The banks still trade off this reluctance of their customers to try new stuff and switch.

    Truth is most of the incumbants DO suck and if the “new guard of technology-driven entrepreneurs” are NOT “going to come in and change everything” then – sadly – no-one will.

    Thanks,
    martin@beaconstrategic.com

  8. Hi Ron,

    In my opinion, a bank is really nothing more than a technology company with branches and regulators. If you take away the branches, the only difference is the regulatory barriers to entry.

    Those regulatory barriers to entry mean that the industry regularly enjoys gross margins of 35%. This despite the fact that customers hate banks (http://www.jdpower.com/finance/articles/2010-Retail-Banking-Satisfaction-Study, http://www.americanbanker.com/issues/175_101/bank-distrust-survey-1019854-1.html), and banking employees are uncommonly well-paid (http://pages.stern.nyu.edu/~tphilipp/papers/pr_rev15.pdf)

    I’m also not sure I understand your distinction between technology companies and services companies. In my mind, Twitter and online banks are both in the business of serving customers using technology, and cell-phones or debit cards are just enablers.

    I seem to detect a hint of – “these guys are inexperienced amateurs, it hasn’t been done before, no way they can succeed”. A little more investigation may reveal that

    – we do have some relevant experience in financial services and banking (http://shamir.karkal.net/resume.html, http://www.linkedin.com/pub/joshua-reich/0/5b1/1a0)

    – high customer service online only profitable banks do exist (https://www.usaa.com/inet/ent_utils/McStaticPages?key=about_usaa_corporate_overview_awards_and_rankings)

    – as for success, only time will tell. Personally, I am happy to be lighting a candle rather than cursing the darkness.

    As is usual in such matters, Google is your friend.

    Shamir
    P.S. – Twitter could be profitable tomorrow if they wanted to be; they’ve chosen to prioritize rapid growth over profitability, a strategy which ING Direct also pursued for the first few years of its existence.

  9. I have summarized some of my thoughts on this topic here: http://tekfin.com/2010/05/26/skeptis-have-it-wrong-there-are-great-opportunities-for-disruption-in-financial-services/

    While I understand your point on the sensationalism of Techcrunch, I do believe the opportunities that Mint/ Banksimple, and others are seeing can have them be competitive against incumbents (and also impact some of them to change).

    A bit of bravado is also a good thing to have sometimes 😉

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  11. Shamir: Thanks for taking the time to comment. I don’t mean to suggest that you or any one on your team are “inexperience amateurs”.Addressing a couple of your points, you said:

    — “customers hate banks”. In general, this is true. Unfortunately “in general” isn’t the right perspective. In research Aite Group has conducted, we have, indeed, found that consumers trust in “banks in general” is quite low. HOWEVER, nearly six in ten consumers trust their primary bank.

    — ” high customer service online only profitable banks do exist.” USAA is an odd example to offer up as proof here. They’re hardly an “online-only” bank, (let alone a “bank”), as they’ve been a full-service financial services firm for a long time, having provided phone- and mail- based support for a long time. USAA exists to serve a well-defined segment of the market, and was not created because — nor competes on the basis of — “banks suck.”

    — “regulatory barriers to entry mean that the industry regularly enjoys gross margins of 35%.” Looking at bank-wide gross margins is deceptive. These margins reflect the conglomeration of many different product lines. Will BankSimple get into institutional trading and commercial banking, ie., areas where margins are much higher than on the retail banking side? The retail banking units do not “enjoy” 35% gross margins from what I can glean.

    — ” a bank is really nothing more than a technology company with branches and regulators.” Not sure how this jives with your previous comment about successful online only FIs. I tend to think of banks as “money movers” — they take money in and send money out. How efficiently and effectively they do this impacts their success. How well they provide advice and guidance to consumers about how well they (the customer) manage their money impacts their success. How much they pay consumers to keep their money with the bank, and/or to get money from the bank impacts their (bank’s) success. What exactly is BankSimple going to do better than the rest of the industry to compete?

    p.s. I’m afraid I can’t buy into your description of Twitter — ie., “chosen to prioritize rapid growth over profitability”. Twitter hasn’t “grown” anything other than a user base. I’m sure that with your background in financial services, you know that ANY firm can grow a base of “users” (you really can’t call them “customers” if they’re not paying) by giving away the store. Ask any insurance firm: They’ll tell you they can double their business overnight by lowering their rates and giving every bad risk car driver an insurance policy. But it isn’t PROFITABLE business, and that’s the way we keep score.

  12. As one of the early investors in BankSimple, we clearly believe that they have a very interesting (and potentially highly profitable) business model. I sympathize with your disdain for TC’s superficial treatment of many start-ups and the opportunities they seek to address (in any industry) but to be fair to them, I’m not sure they are really in the market to provide in-depth thoughtful analysis and for what they do – start-up newsflow – they do a good job.

    People love bucketing and indeed we often have to be quite deliberate in articulating our focus as “technology-enabled innovative business models in financial services and markets/marketplaces” as by default (most) people want to categorize us as technology investors OR financial services OR financial technology investors. Semantics sure, but I think goes to the heart of the key point I think you were trying to make (which I would agree with) ie that except for pure technology companies all companies need to focus on the service and/or product they provide and the competitive environment (and not on the technology per se.) That said, the ability to rethink existing business models or create better services and products through the intelligent application of modern technology is a huge opportunity generally and – in our view – especially in financial services.

    Banksimple is an early stage start-up and faces all the normal risks this entails, plus a few more specific to the challenging arena of financial services, but we think Josh and Shamir are on to something and look forward to helping them succeed.

  13. This approach is nothing new or unique. Look at Ally, for example. “New” banks are all promising no fees, high rates, exceptional customer service. And while all these are great, the average consumer isn’t going to put their money in these financial institutions. As much as we might say otherwise, the average person wants the brick and mortar bank down the street that they can go into. Yes, fewer people are visiting physical branches, but we want the comfort and convenience that if a problem arises or if we need something, there’s a bank we can physical go to. The only time we call a company is when we have a problem. Why create a business that’s purely online and the only way to get a hold of someone is – calling (we hate calling to talk business).

    Additionally, while more people are trending toward online and mobile banking, there’s a sense of safety and security with physical brick and mortars. Simply having FDIC Insured on your website doesn’t create the sense of security to the average person. They’re skeptical of online-only businesses. It’s just our mentality, sorry.

    Is there a market for BankSimple? Maybe. You look at the success of SmartyPig and people are willing to try online-only services. But BankSimple isn’t going to change the foundation of banking. Creating a cool technological tool (i.e. Twitter) is a completely different ballgame than changing something everyone has some skin in the game. It’s too important. I applaud the thought and efforts, but ultimately see a less-than-stellar outcome.

  14. Sean: Thanks for commenting. Much appreciated, especially since the battle to innovate and transform the financial services business will hardly be played out on the blogosphere (let alone this blog).

    I think you’re really getting at the heart of my critique: The attention BankSimple is getting (maybe I’m just jealous, eh?). If BS hadn’t brought on a Twitter exec, would it be getting attention from the likes of TC? I don’t think so, and I hope not. Because, to date, BS has done NOTHING. Well, other than state its intention to not suck and help change and improve the banking experience. So why should anybody be paying attention to this firm at the moment?

    But I understand that that’s what the firm has to do to attract additional funding (if it needs it) and especially to attract talent.

    But thanks again for commenting and good luck with your investment in BankSimple.

  15. …Or like Google, who also didn’t start out with a revenue model, but have become a company with $150B+ market cap.

  16. Martin: Thx for your comment, sorry for taking so long to respond. I think you’re right that Zopa is a good case study. Especially in the US, where it had to cease operations. The example just goes to prove that technology + entrepreneurial spirit + slobbering press coverage doesn’t produce success.

    At the risk of sounding like a bank apologist, I have to challenge the notion that “truth is most incumbents do suck.” While many consumers distrust banks IN GENERAL, they do tend to trust their own primary bank in the US. And in Forrester Research’s annual research on advocacy (bank does what’s for customers, not just its bottom line at expense of customers) credit unions score very highly. Are credit unions not “incumbents”? What about all the community banks out there? Do they all suck, too?

    I agree with you that a new guard of technology-driven entrepreneurs need to come in — but what they need to focus on are the real problems and opportunities in the market — not the (soon to fade) populist notion that all incumbents suck.

  17. I agree with Jeff and Jeffry. Technology is just a tool. Banks wouldn’t exist without it, but they also would not exist without sound financial management or tellers, neither of which is very sexy. Unless Bikini Coffee starts a bank. The point it, tech is cool and it is easy to focus on that to make a bank cool. Could someone start a bank or CU that focused 100% on financial management as a differentiator?

  18. RW: Considering that women manage the finances in so many households, Chippendale Bank might be a better idea than Bikini Bank.

  19. No, look at it the other way. We’re helping develop an underserved market (men managing finances). I’m sure we’ll get a lot more guys volunteering to take care of the bills and balancing the checkbook!

  20. Robbie, check out my website. I currently work for a bank and have been trying to get them to buy into this idea for a few years.

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