Why Google Won't Become A Bank

Search Engine Watch published an article titled Why Would Google Become A Bank? and basically answered the question in the first paragraph by saying “Because that’s where the money is.” The article goes on to list a more specific set of reasons including:

  1. Increased value for AdWords ads.
  2. The power of the coupon just got better.
  3. Further diversification of revenue streams.
  4. Data.
  5. Android and Chrome usage increases.

My take: Don’t hold your breath waiting for Google to become (or launch) a bank. It isn’t going to happen. Here’s why:

1. It’s not where the money is. The prospects for mobile payments is certainly bright. But the question that remains to be answered is: Who’s going to make money from these payments? If you, your bank, or anyone else thinks that consumers will pay a fee or a premium for the “privilege” to make a mobile payment, you (and they) are sorely mistaken. Banks’ ability to make money from transactions — mobile or not — has seen its ups and down in the past few years (up on credit cards, then down on credit cards, up on debit cards, then down on debit cards). Retail banking is simply NOT “where the money is.”

2. Nobody in their right mind wants to be regulated to the extent that banks are. For the past few years, regulatory changes have hacked away at banks’ ability to make money. The Card Act, Regulation E, Durbin’s Folly, the list goes on. From a new entrant standpoint, it’s simply too risky and unpredictable to enter the industry. Firms like BankSimple and Movenbank are getting into the industry by either leveraging other firms’ bank charters or by avoiding the need for one altogether.

3. They don’t have the support infrastructure. Google isn’t a B2C company, it’s a B2B company. It has no competency — let alone capability — to provide transactional customer support. So I hear you say,”but they’ll outsource that.” No, they won’t. Outsourcing a critical business function doesn’t absolve you of the need to know how to manage and integrate that function into your business

4. It doesn’t fit with the firm’s business model. Even if you argue my three previous points away, the most important reason why Google won’t become a bank is that it just doesn’t fit with its strategy and business model. Google’s strategy and business model is unique and ambitious: It aims to be the center of the universe in INFLUENCE.

Why did Google acquired Zagat? To influence your choice of restaurants. Why did Google launched Google Advisor? To influence your choice of banks.

Google doesn’t want to process mobile transactions, open bank accounts, and deal with your stupid little banking questions.Google wants to influence who you do business with. And not just in banking and financial services, but everywhere.

When Google is influencing all of your day to day decisions, then every provider in the world will be kissing Google’s shiny black boots looking to participate. And THAT’S how Google will make money. Not by becoming a bank.

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Stop The Banking SMadness

The “logic” behind the justification of social media as some new emerging “power” channel in banking is so twisted and misguided, that it just HAS TO STOP.

In an article titled Mobile and social to emerge as power channels for banking, Finextra recently wrote:

“Social networking is becoming more popular, with 57% of adult Internet users [in the UK] using online social networks in 2011, up from 43% in 2010. The UK data is in line with international trends. A just-published survey of 12,000+ Canadian consumers issued by JD Power & Associates finds social media emerging as an increasingly important alternative to traditional retail banking channels. More than 60% of retail banking customers responding to the poll say they use social media. Among customers who use social media for banking purposes, 24% indicate they use it to discuss their banking experience or inform their bank of a customer service issue.”

First off, the last sentence is completely misleading. Sixty percent may be using social media, but that doesn’t mean that all use if for banking purposes. So when the last sentence says that “among those who use SM for banking purposes,” we have no idea how many that actually is.

If it’s 10% of the 60%, then 24% of that means that only 1.5% of Canadians use social media to discuss their banking experiences or for service issues. Ooooh….1.5%!

More importantly, however, is the false logic behind the claims. Just because a large percentage of people use a technology doesn’t make that technology relevant to all applications. 

Using the logic from Finextra (yes, I’m singling them out, but let’s get real — they’re hardly the only ones singing this tune), the following would be true:

McDonald’s to become “power” channel for banking!

Everyday, 27 million Americans — nearly 10% of the total population — visit a McDonald’s location. And that number is growing by 1 million every year. Over the course of the year, on average, Americans visit McDonald’s 33 times! Among Americans who visit McDonald’s, 99.9% make a payment (some just use the restroom) while they’re there. 

But wait, you say, the two examples aren’t analogous. After all, banks can’t take a customer service question at a McDonald’s.

True enough, but they can leverage McDonald’s to influence consumers’ choice of payment mechanisms (and you better believe that, as a result of the recent interchange regulations, this is going to happen a lot more frequently).  And with 27 million Americans visiting McDonald’s every day (and making a payment there every day) which channel — social media or McDonald’s — is more likely to emerge as “an increasingly important alternative to traditional [marketing] channels”?

I’m not arguing that social media isn’t important. Just trying to bring a little perspective to the situation. And trying — probably in vain — to turn down the volume a notch or two on the social media hype.

P2P Lending — The Bank And Credit Union Way

I’ve often thought that banks could easily squash P2P “lenders” like Prosper and Lending Club by creating an online lending marketplace of their own. In addition to the organic traffic they could drive to the site, they could refer loans they decide to pass on themselves, and give the option to investors/savers looking for higher rates of return than they’d get with CDs to lend money in the marketplace.

Lending Club charges a processing fee ranging from 2.25% to 4.5% of the loan amount, and hits investors with a service charge of 1% of each payment received from a borrower. Seems to me that banks could easily underprice that.

But there’s another P2P lending opportunity for banks and credit unions to capitalize on.

Do you know how much money is lent between family, friends, and acquaintances? I doubt that you do, because, as far as I know, Aite Group is the only firm to have estimated the volume of P2P transactions that occur in the US.

We’ve estimated that US consumers borrow (and presumably, repay) nearly $75 billion from each other (and not from financial institutions or other types of businesses, legal or otherwise) each year. On average, every household in the US makes two loan payments to other people for money they’ve borrowed.

That last number is actually pretty useless, since a large percentage of households don’t make any P2P transactions for the purpose of repaying loans. But in our research on consumers who use alternative financial services (e.g.,  payday loans, check cashing services, etc.), borrowing from family and friends is the second most popular source of funds (after overdrawing on their checking accounts, which might not count).

In fact, of the alternative financial services customers that Aite Group surveyed, one in four borrowed from family or friends three or more times in 2010, and more than one-third did so more often in2010 than they did in 2009.

This is a huge P2P payment opportunity for banks. Note that I didn’t say it was a P2P lending opportunity.

How are these loans and agreements documented? I have no idea, but my bet is that in many cases they’re not documented at all. After all, among friends, verbal agreement is just fine, right?

But if there was a cheap (i.e., free) and convenient way to capture the details of that loan, and a way to actually transfer the money between participants — cheaply and conveniently — don’t you think a lot of people would use it?

The money in the P2P lending space for banks isn’t from loan processing fees or from taking a cut on the interest rates. The money is in the movement of funds.

To date, banks, as a whole, have floundered with their P2P payment offerings. CashEdge and Zashpay have gained some traction, but have hardly become household names. PayPal is a household name, but the vast majority of their business isn’t P2P.

Why haven’t P2P payments taken off?

Banks are marketing it all wrong. They’re pitching the “electronic” aspect. Big deal. People don’t care about channels and methods. They simply care about what’s the most convenient thing to do when they want to do it.

Instead, banks should be marketing convenient alternatives to transacting certain types of P2P payments — repaying loans to other people being one type.

Banks could provide an online capability for the parties to document the terms of the agreement, establish repayment parameters, and enable either the automatic or manual transfer of funds. All for the low fee of a P2P transaction, and not a cut on the loan. No future disagreements about the terms of the agreement, and proof of payment.

In addition to improve the way existing customers transact P2P loans between family/friends, this approach might help attract un- and under-banked consumers who could fund an account that could either be a savings account or take the form of a prepaid card account. 

The real winner, though, will be P2P payments. By driving trial of the service, consumers may find it convenient for other use cases.