Connected or Tethered

I recently stumbled upon two branches of the Apple Bank in New York.  I wondered if this was the extension of ‘Apple Pay’.  I was challenged to think about a potential ‘Google bank’ and what that might mean.  (Just to be clear, I later learned that the Apple Bank in NYC has nothing to do with Apple Inc.)

Life in our ‘consumer driven’ digital age has a political face that should be of concern to credit unions, as the institutions of ‘ordinary people’.  In the race to be at the front lines of ‘technological’ progress, we are delighted with each new IT innovation that makes us feel ‘connected’  and gives us ‘convenient’ access to goods and services.  But there is a darker side and personal privacy is certainly under attack.  Increasingly the big IT mega corporations – Apple, Amazon, Google, Microsoft – see opportunities in leveraging existing business to reshape ‘banking’.  Will we be better ‘connected’ to one another, or tethered to a new cyber-commerce fiefdom?

An opinion piece in the Globe last week chirped the ‘upside’ of the digital age; Why Can’t My Bank be More Like Amazon?  (The writer consults to the industry.)  Another report from the World Economic Forum is more cautious.  “Financial institutions will likely need to walk a challenging line between capitalising on the services of large technology players and becoming dependent on them,” says Jesse McWaters the lead author.

Retail banking has three convenient silos; payments, lending, and deposit-taking.  These have been at the core of our vision of financial services for many decades and these functions are supposed to complement the needs of other economic sectors; manufacturing, retailing, hospitality, etc..  Finance is in service of the ‘real economy’.  Regulations have been implemented to limit banks (or other FI’s) from doing other kinds of business, and vice-a-versa.

In economic terms, intermediaries simply aggregate deposits and savings to make loans & investments, creating for efficiencies in capital utilization.   The privileged role of banks (and other FI’s) enabled governments to ‘manage’ the money supply.  But now the information age arrives and it becomes clearer that ‘banking’ is simply information management.

The players in the world of Big Data have already demonstrated the power to reshape industries.  Amazon, EBay, Alibaba, Google and others have already reshaped retailing.   YouTube, Netflix and others have disassembled the world of broadcasting.  Uber, Lyft, AirBnB and others are re-inventing the travel business.  Facebook, Twitter, Instagram, Skype and others are re-configuring the telecommunications industry.  Generally, traditional relationships are failing and new ones are being created – without the protections that might otherwise exist.

In financial services, the payments processing and settlement function has attracted the most attention.  In the report titled The Payments Revolution, Are You In?  the firm Ernst & Young contends that the consumer interface is moving from ‘omni-channel’ and ‘omni-commerce’.  “At the edge of this trend is a movement that further blurs the lines between shopping, purchasing and paying. In this environment, payments are becoming increasingly invisible at the point of purchase. What we see emerging is an integrated shopping environment that  seamlessly links search, shopping, ordering, payment, shipping and loyalty services into one smooth, low-friction ecosystem.”

Payments data is extremely valuable in the world of Big Data. In the information age the players want to know all about you, and they will tell you that ‘it is in order to serve you better’.  They want to know what you are reading, viewing, searching for, buying, saying, doing, wearing, and fantasizing about.  One more horizon exists:  How much money do you have?  How much credit do you have?  How much do you make?  What are you spending your money on?  This is marketing gold in the new Internet world.

In economic terms, the vendors have exceptional informational advantages, or ‘information asymmetries’ exist that stack the deck against a consumer.

PayPal has arisen out of nothing and reported over 100 million active users by 2010.  Apple, with one of the largest client bases in the world, has created Apple Pay (now available thru all major Canadian banks & Coast Capital).  Credit unions are being recruited by Google to partner with Android Pay.  A little late in the game, the major banks are moving to protect their ‘territory’ with VISA checkout, MasterPass, and e-Transfer services.  Digital currencies are also active with the best known, Bitcoin, used by an estimated 3 million people and processing almost 10 million payments monthly.

But that ‘data’ is secondary in the view of traditional FI’s, for whom it is a service and  a revenue source.  Some customer data is potentially mined for marketing purposes.   However, multinational IT companies, will likely pursue these data resources as part of the larger more comprehensive data driven business vision.  Credit unions are placed in a compromising position.

• Do credit unions simply sign on as agents of these large multi-national machines that intend to ‘prey’ on credit union members?
• Do credit unions opt to align with banks in a rear guard action to preserve traditional territory (and client privacy)?
• Do credit unions ‘mine’ the data they collect to fend off the charge of large multinationals?
• Do credit unions sign on to digital currency offerings to allow their members access to anonymous payment privileges (similar to cash)?

Lending has also become a front.  IT operators provide convenient adjunct credit facilities.  In this context ‘dis-intermediation’ a the strategy, as web-based tools create new ways for borrowers and lenders to find each other.  And  PayPal Credit was set up in 2008 to allow for lines of credit attached to consumer PayPal accounts.  A Facebook subsidiary, Lending Club, makes consumer loans from $1-$40k using a Peer-to-Peer lending model, originating over $16B in loans since 2008.  Amazon Canada promotes its own VISA card with attractive pricing.  Smaller new fintech players are also evolving P2P platforms, LendingLoop.ca brokers loans to small business.  Canada Drives has found a niche in auto loans.  Smartphone apps like MOGO offer convenience and pizazz, usurping some of the role of an FI.

Essentially, non-traditional competitors are changing the market.  PayPal, Amazon and Facebook already have moved to claim positions.  Google and other big IT operators will likely acquire complimentary positions in the provision of credit.  The recent Google partnership with Walmart is a step in this direction.

Deposits are being challenged by ‘near deposits’.  Ordinary people can now easily invest directly in mortgages, consumer loans, and small business loans.  The traditional role of a financial intermediary – polling small deposits and lending them out – is being eroded.  The P2P lending apps, and innovative mortgage brokers, are direct competition to credit unions.  ‘Substitutes’ have also arisen in the online world, Credential Direct for one makes it easier for savers to place their funds in capital markets.  The recent years’ growing deposit portfolios in credit unions may not be sustainable (and are in part due to demographics).

The challenge is to see if locally based, democratically owned, credit unions can serve and protect the long term interests of member-owners and their communities; their privacy interests, and their bargaining position in various markets – so they don’t get hosed.