Will Facebook be the next challenger bank?
We know that amongst certain age groups, Facebook is a more trusted brand than a bank. Facebook also has e-money and payment services licences in Europe now, having made P2P payments in the US possible last March. ‘The license enables us to roll out products like charitable donations on Facebook or peer-to-peer payments via Messenger in Europe, as we have in the U.S.,’ they told TechCrunch. They have hired former PayPal president David Marcus as head of Facebook Messenger, and are basically making no secret of their ambitions to conquer the world of payments.
Whether or not Facebook actually becomes a bank, it’s clearly already helping people get their money management tasks done, as TransferWise has shown this week. So what’s next?
The third phase of digital banking
The first phase of digital banking was focused on moving services from the physical world to the online world i.e. adding functionality. This was where the competition was, with various incumbent providers competing to be the first to offer this feature or that feature.
This phase of development is largely complete as, whilst there are still a few services that require a person-person (or person-machine) transaction, the majority of everyday servicing can be done online or on mobile, regardless of who you bank with. This could have put innovation in digital banking at risk of stagnation if it wasn’t for new market entrants such as Monzo and Revolut pushing development into phase two – where the focus is on user experience.
These newer providers offer nothing new in terms of functionality but they sell themselves based on the experience that they offer. This is evident from the way that features work (e.g. Monzo’s card freeze feature actually places frost over the image of the card within the app) and also from the way that they market themselves with language being very adjective heavy: think ‘beautiful,’ ‘fast,’ and ‘smart.’
Whilst this strategy has been very successful in garnering media attention, it is not enough to turn them into financially viable independent business in the long-term. In order for these challengers to capitalise on this opportunity, and for the incumbents to maintain their market share, they will have to move into the third phase of digital development: creating lifelong relationships with customers that engender active rather than passive loyalty.
To do this well, financial services providers will have to become equal partners with their customers, focusing on helping them achieve their financial goals rather than just selling them financial products and, given the rise of the Internet of Things, it will also require providers to interact with more than just the individual and the payments they make themselves. In other words, it will require providers to create an ecosystem or ‘hub’ through which all financial transactions can be made and analysed.
You will note that we say ‘providers’, not incumbents and challenger banks. This is deliberate because, with the introduction of PSDII providing the legal framework for the implementation of the open banking standards recommended by the CMA, this ecosystem (or account information system) need not necessarily be provided by a bank of any kind – it could be provided by any third party and that includes social platforms such as Facebook.
We’ve heard Tom from Monzo last week, for example, talk about data and digital identity as the ‘future of payments’ – and Facebook certainly holds plenty of that.
Facebook: the ideal bank?
Facebook already has means for customers to make payments; its messenger platform hosts a number of messenger bots that can help people manage and understand their finances, and it knows a lot about an individual’s identity. This latter point is particularly important, as the other main focus of PSDII is improving security and it is apparent that no current security or authentication method is foolproof. Consequently, there is a push to move towards multi-factor authentication that makes use of information that is harder to fake. Increasingly, it is believed that this information will be behavioural information.
One of the main challenges currently faced by banks (both incumbent and neo) is effectively selling on mobile. Following various mis-selling scandals, all banks are trying to achieve the elusive ‘selling without selling’ i.e. identifying a customer need and offering them a product or service that will accurately meet this need rather than deciding that they want to sell a customer a product regardless of whether it will mean anything to them. Facebook is already considerably more adept at analysing its users data to improve their experience and recommend them services, products, events etc. based on their behaviour. If it is able to apply the same logic to transactional behaviour and combine this with its understanding of social behaviour, it will be able to accurately recommend the right financial services product that will meet the customer’s need in the context of their current stage in life that meets their personal goals (i.e. buy a house, get married, have a child) and supply them with the advice on how to get the most out of the product. If it does this well, there would be no need for the individual to ever interact with the actual bank that is providing the ‘product’ in question.
Ultimately, this makes it clear that when Facebook says it is not interested in becoming a bank, it probably isn’t lying… but this doesn’t mean that it is not interested in entering the financial services market.