Where innovation in banking really comes from
This week, Apple (in association with their partner bank Marcus) announced a brand new savings feature or savings account, offering a competitive 4.15%. But the fintech sphere is agog at its simplicity and elegance, something that any bank in the US could have done at any time but didn’t.
Apple’s move is fantastic for users, but it’s hardly innovative. I’ve written extensively on Alipay’s marriage of Yu’e Bao into their wallet ecosystem making it the most successful Money Market Fund in the world for almost a decade. At it’s peak in March 2018 Yu’e Bao held $268 Billion in deposits — more than 4x the average deposits held by the top 250 banks in the United States (source: MX)
When it comes to innovations in deposit taking, it is clear for anyone watching deposit flows, that today mobile phones are far, far more effective at garnering deposits than bank branches — one of their stated purposes. In fact, it’s likely that the run on SVB bank resulting in it’s collapse, would not have happened absent this revolution in deposit behavior. Deposits move at the speed of the internet today.
Looking at the last decade, there have been standout innovations like Behavioral Savings tools ( Apple’s Savings Feature, Alipay’s Yu’e Bao) innovative credit models, new customer scoring mechanisms, financial wellness treatments and so forth.
Bank innovation is largely predictable, but hard
In my book Bank 2.0 (written in 2009, published in Apr 2010) I forecasted that mobile-based payments would overtake the use of plastic cards and cash by 2016. This happened in 2017 when Alipay and Tencent WeChat Pay exploded in China. I forecasted that both branch banking and internet banking would be surpassed by mobile app-based banking by 2015 for transactional activity and 2018–2020 for account opening. These were simple extrapolations of technology diffusion adoption cycles.
In 2012 Alex Sion and I travelled to Washington to meet with the FDIC, FED, Consumer Finance and Protection Bureau and US Treasury about the upcoming launch of our challenger bank Moven. At the time we had developed a financial wellness scoring mechanism that we wanted to use to incentivize social engagement — we called it CREDScore.
One of the techniques we wanted to try was a dynamic savings rate, that would increase your APR the more you referred friends to Moven. Essentially our model was attempting to use variable interest rates to offset acquisition costs. The CFPB essentially told us that this would require an act of congress, as the current regulations around savings accounts in the US required us to establish “published APR rates” that were consistent for all customers. The regs were written based on the construct of a typical bank savings account.
When it comes to breaking out of that cycle of regulation and compliance guard rails, it takes quite aggressive design thinking and a consultative approach with regulators that is rare in the industry.
It’s not like the innovations that we’ve seen in banking have surprised us. In fact, in most cases they’ve been extremely predictable. Even the timing and take up of these innovations have been, within a range of probabilities, fairly obvious. Yet when we look at the historical record over the last 10–15 years, it’s shocking that almost all of the major innovations have not come from within the traditional banking industry, but new entrants.
Where innovation is birthed
When we look at industries disrupted by the internet, we see a plethora of traditional sectors reshaped by new entrants as illustrated by the impact of Uber, AirBnb, Netflix, SpaceX, Tesla, etc.
Let’s look at some of the innovations that have taken place in the banking and payments space in the last 10–15 years and where that came from to get a sense of how hard it is for banks to lead innovation in the sector. If you know of earlier examples, let me know via Twitter or LinkedIn and I’ll update the list here.
Here are a selection of some innovations from around the world as a reference:
Mobile Wallets (Banks 0, Card Schemes 0, Telcos 1, Techfin 1)
Telcos led the way with simple on-sim value stores in the late 1990s early 2000s, starting with simple airtime value stores. But the real advances in modern mobile wallets started with MPesa (2008) and Alipay/Tencent WeChatPay (2013). While the African Mobile Money and Chinese Mobile Wallets do link to bank accounts, they are their own self-contained value stores acting as a bank account proxy. Even with the massive success of Alipay and WeChat Pay in China, it wasn’t until UnionPay 2.0 that banks started integrating heavily into these wallet ecosystems. In the US, most major banks are now on Apple Pay, but that integration has been slow. Worldpay estimates by 2025 51% of all retail commerce globally will be on mobile wallets.
Internet Account Opening (Banks 1, Fintechs 0)
Wells Fargo reportedly offered an online feature for a basic account opening back in 1996, but you still were required to sign a paper application form sent by the bank. Egg was likely the first to offer account opening organically online as part of the customer onboarding process, supporting online account opening in 1996.
Mobile Account Opening (Banks 1, Fintechs 1)
Jibun Bank had iMode based account opening as early as 2009 (see TheFinanser), but the first mobile-app to offer in-app debit card offerings without a signature was our very own Moven in 2012 (see TechCrunch), followed closely by GoBank/Green Dot (Greendot initially required a signed application form after online registration). Simple didn’t have a mobile app on Android until 2013, and you couldn’t sign up in the app at that time. Today, a wet signature (as the industry calls it), is becoming less and less of a thing, but in 2012 when we launched Moven in beta, it was still groundbreaking to not require a physical signature.
Income Smoothing/Salary Advance (Banks 0, Fintechs 1)
Starting in 2014 we started to hear of various startups offering income smoothing (Even, EarlySalary, PayDay, etc), or salary advance credit offerings. Only in the last 2 years have we seen a few banks copying this feature set.
Digital Currency (Banks 0, Regulators 0, Crypto 1)
While the Bitcoin whitepaper was released in 2008 by the Satoshi construct, we had been playing with digital currencies in the online gaming space since well before that. It wasn’t until 2014 that China began experimenting with Digital Currency in a form that would be backed by the full force of the Central Bank. However, we could go back to the likes of QQ Coins, offered by the instant messaging platform QQ (precursor of WeChat) back in 2006.
Contextual Credit/BNPL (Banks 0, Fintechs 1)
Klarna and Affirm are well known players in the BNPL space. You could argue that stores like Nordstrom issuing private label credit cards are the progenitors of BNPL. However, Affirm and Klarna did what Apple has done with savings, they lowered the friction significantly and didn’t require the delivery of a physical card artifact, or a wet signature on an application form. Given the state of overdraft fees in markets like the US, it is astounding that more flexible forms of in-store credit have not already been developed. Expect much more innovation in this arena.
Fractional Stock Investments (Banks 0, Stock Brokers 0, Fintechs 1)
Robinhood popularized fractional share holdings in recent years (GameStop anyone?), but this was pioneered by a DotCom player BuyandHold back in 1999 — since defunct. For just $1–3/month you could make fractional investments in listed companies.
Financial Wellness (Banks 0, Fintechs 1)
Mint takes the moniker of the first broadly accepted financial wellness platform back in 2006, acquired in 2009 by Intuit. Intuit has since made a number of acquisitions in this space including SeedFi earlier this year. Incidentally, Moven filed the world’s first financial wellness patent in 2013. But Intuit technically started working on PFM (Personal Financial Management) way back in 1983 (See Wikipedia). Moven was the first day-to-day banking app that integrated financial wellness into the app, replacing the typical list of accounts at sign-in with our spending meter.
Real-time Online Payments (Banks 0, Fintechs 1)
X.com and PayPal takes the prize here with the first version of their online payments system launched in 1999. Real-time Payments are still relatively rare with about 60 countries that have this capability. The US has been a laggard on this front, despite the leadership from the private sector in this respect. Certainly MPesa and WeChat Pay were global pioneers in real-time payments enabled by mobile phones in their respective markets.
Real-time Transaction Receipt (Banks 0, CardSchemes 1, Wallets 1)
While Amex pioneered simple text-based transaction receipts around 2010, real-time transactions in wallets today are fairly normal. Some banks followed with SMS based transaction receipts during the last decade, but mobile banking apps made notification-based receipts widely viable. Yet, the vast majority of banking apps still don’t provide this basic feature for wallet or card-based day to day transactions
Challenger Banking Apps (Banks 0, Fintechs 1)
Despite the launch of Egg (Prudential) ING Direct and UBank (NAB) as early internet banking platforms, the emergence of challenger banks and their leadership in mobile app-based banking design is fairly clearly established. Banks in the UK have repeatedly had to defend their late development of best-practice mobile banking experiences. Most banks still don’t have core customer experience capabilities that are common within fintech challengers today
Robo-Advisory Platforms (Banks 0, Capital Markets 0, Fintechs 1)
Betterment pioneered this field starting out in 2008, and was followed a few years later by industry names. But the first push was again fintech, not internally led.
The picture becomes clear
What is clear from the above examples is that if you look at a broad set of innovations in the financial services space over the last two decades, more than often these innovations have been led by new entrants, not incumbents.
The number of truly innovative banks globally that have consistently pioneered features like this, likely is less than what you can count on two hands. If you are working on innovation in a bank, you are generally a follower, not a leader.
Today, all of the fastest growing Financial Institutions in the world are digitally oriented, using the ability to scale digitally at lower acquisition costs. Yes, many of these players like Revolut are yet to be truly profitable, but some are massively profitable, like WeBank out of Shenzhen. This telescopes market share in the future.
I predict that Apple, like Alipay before it, will become one of the largest deposit holding organizations in the US.
You can argue it’s because of their smartphone and App platform, of course. What you can’t argue against is that their simple approach to onboarding a customer for savings could have been done by any bank in the last 10 years, and most have not opted for such simplicity, sticking with the tried and true “Savings Account Opening” process as defined by their traditional branch business. With AI, behavioral savings and credit access are going to become the norm and we can expect players like Apple, Meta, Google and OpenAI to become gatekeepers in this market. Pushing out these antiquated approaches to customer onboarding and engagement.
Already branches are in terminal decline. If you rely on a branch to open a savings account, think about how backward that is in today’s environment.
Ultimately if you require a signature on a piece of paper it’s a miracle you are not dead already.
