The brave new world of Web 2.0 will require a brave new approach from banks if they are to keep their customers, writes Joshua Weinberger.
Banks have long tried to leverage technology to hit the most elusive triple: new-customer growth, customer retention and per-customer revenue. When the 24-hour ATM was a rarity, for example, Citibank could get serious mileage out of a marketing campaign that trumpeted its ability to service “the city that never sleeps”. Retail banks – especially those in the US – practically tripped over each other around the turn of the century, developing ever-more-intricate online banking sites in an attempt to combat the inroads made by “net banks” such as E*Trade and Egg, entities that sported lower overheads, more attractive lending and interest rates, and cutting-edge functionality. (At one point, Bank of America famously touted its website’s ability to “build your own bank”.)
But today, as functionality becomes more of a commodity, banks are discovering that they need to deploy technology in new ways to differentiate themselves in the eyes of the consumer, and to maximise their marketing reach in both the online and offline worlds.
Enter the Web 2.0 revolution, which, depending on whom you ask, is either a simple return to the days of the dot-com ‘disintermediation’ (a removal of the middleman, passing the savings on to the customer) or a dynamic paradigm shift in how the banking industry interacts with the everyday consumer, changing forever the sector’s economic model. Which is it? Regardless, how can banks thrive in either a world without middlemen or one with a whole new model?
Well, they must find a way, and soon. By 2012, according to Gartner, the US-based consultancy and research firm, 75% of banks will use Web 2.0 technologies in retail delivery.
2.0 versus 1.0
At its heart, Web 2.0 is a handy catchphrase comprising any number of software applications, almost all of which are internet-based, and all of which allow for the involvement, on some level, of the end user: wikis, blogs, social networking, review sites, virtual environments, automated information feeds, and so on. What makes the newfangled bells and whistles possible – even practical – is the explosion of high-speed and extremely high-speed broadband connections from the home.
Unlike their earlier 1.0 counterparts, Web 2.0 applications are by their nature interactive and structurally ‘messy’ – the medium (and its content) hardly ever remains static, rendering any effort to maintain a consistent corporate message when it comes to branding, outreach, and marketing a definite challenge.
Some of the other technologies that have been tagged as 2.0 include:
- Ajax, which helps to deliver a more active, real-time set of data to an internet platform;
- collective intelligence, which is Gartner’s phrase for the rash of collaborative applications that allow far-flung users to work together simultaneously;
- ‘mashup’, which is a dynamic combination of two basic pieces of software to serve a specific function;
- location-aware (or ‘presence’) systems, which will tailor content to a user’s specific location;
- mesh networks, which deploy multiple nodes to extend the reach and power of a network;
- the Semantic Web, which is a form of coding that will capture an ever-increasing depth of data from online users.
The collaborative nature of Web 2.0 applications and the openness of their structure is what makes them appealing to so many young, affluent, tech-savvy users – a demographic that banks have often had difficulty reaching.
Where the financial services industry has often come up short, many analysts say, is in the ‘push’ technology endemic to the first generation of internet technology. One example of these old technologies is e-mail marketing, in which, according to a recent study by US analysis firm Forrester Research, financial services firms ranked last among six verticals.
Although the financial services sector is often considered a leader in handling online customer contacts, Forrester’s analysts were unimpressed with banks’ strategies in the e-mail channel. Banks were slow to adopt the new medium and were too “focused on pitching products”, its report said. When it came to new-technology marketing, customers “want their needs met, not just to hear about what you have to sell them”, it said.
Some banks seem to have taken the ‘tell, don’t sell’ lesson to heart. Those with a heavy online presence – such as ING and ABN AMRO – tend to view the interaction with customers across multiple channels as a valuable enterprise, and they seem to value staying ahead of the curve as a corporate priority. In December 2006, ABN AMRO, for example, became the first European bank to open a “branch” in the Second Life virtual world (www.secondlife.com).
Along with other real-world multinational companies, such as IBM, Philips, Adidas, Dell, Reuters and Toyota, the bank now caters to the needs of thousands of Second Life players daily. And yet ABN’s plans for the virtual branch are hardly cutting edge – indeed they are primarily informational.
Power to the people
At the time, at least one ABN AMRO executive acknowledged the launch as a move toward maintaining the company’s image as an early adopter. “Second Life is an example of a new-generation internet site… where we want to have a presence from an early stage,” ABN AMRO board member Wietze Reehoorn said in a statement. “It adds an extra dimension to the way in which we experience the internet. It makes internet-based communication with customers more direct and personal. The battle for supremacy between banks… will be won mainly by those who succeed best in the area of personal contact.”
More to the point, the bank claims to recognise that, as a Web 2.0 deployment, Second Life presents an opportunity, not to sell products or conduct real-world business, but rather to position itself properly in the eyes of its clientele – a chance to “create a platform where [potential] customers of the bank can meet each other”, according to a company statement. And that is a recognition of the real shift caused by any Web 2.0 application worth its salt: the collective empowerment of its users, on their own, free from the domination of any corporate message. Banks can participate but the real conversation – the real action – is taking place peer-to-peer.
In the course of those conversations, some concerns have been raised about virtual-world banking endeavours. Gawker Media’s Valleywag, a gossip blog for the technology industry, recently quoted an anonymous financial consultant as taking issue with Second Life’s supposedly “exploding market”. Although Second Life comes “complete with in-game banks, multiple currency exchanges, a floating currency exchange rate, and a burgeoning in-game commerce/business base”, the consultant had found “a fairly obvious arbitrage opportunity [involving] interest-rates paid to depositors at in-game banks versus lending rates, compared with the prevailing exchange rates between [the game’s currency] and the dollar. In this case, interest-rate-parity revealed that two in-game banks were mispricing [sic] rates, implying a 2786.32% return per dollar invested.”
In addition, participants and bloggers have complained that these games, although lucrative from a virtual standpoint, make it difficult for players to translate into real-world currency – further complicating any retail bank’s attachment to the medium.
In some virtual worlds, attempts at in-game banking have seriously backfired. Entropia Universe, an online role-playing game, tried to establish a kind of debit card as a means for players to withdraw real-world dollars from their virtual bank accounts. Unfortunately, the real-world bank administering the cards, North York Community Credit Union of Ontario, and its card provider reportedly ran afoul of the Financial Institutions Commission of British Columbia.
True virtual experience
Small hiccups aside, many of those at the forefront of the Web 2.0 revolution claim that this marks the true beginning of online banking – not just a potentially inert online presence for an offline bank, but a completely virtual experience connecting one consumer to another to conduct financial transactions such as mortgages and small-business loans, all without the interference of the middlemen: the banks.
Take, for example, the social lending model of such sites as Prosper (based in the US) and Zopa (based in the UK). Though each has a slightly different model, the nature of social lending takes the bank out of the picture, creating an online marketplace where people meet to lend to and borrow from each other.
The idea, according to Zopa, is that “with no bank in the middle, everyone gets better rates”. Part of Zopa’s marketing pitch is that, thanks to the peer-to-peer connection between borrowers and lenders, “money becomes human again”. That humanising force is the underlying spirit behind much of what falls under the heading of Web 2.0.
For James Alexander, one of Zopa’s founders and now the firm’s CEO in the UK, the difference between traditional banking and this new form is crystal clear. Compared with traditional banking, he says, peer-to-peer lending offers “a better financial deal”, mainly because it removes regulatory costs and what Mr Alexander calls “unnecessary overheads” – Wall Street office towers, branches all over the country, and superfluous staff and infrastructure.
The interpersonal aspect of peer-to-peer banking is also compelling, Mr Alexander says. Primarily, participants are drawn to the platform’s “stronger social reward”, he says. “People are helping each other to get a better deal at the same time as [they’re] cutting out the banks.” In addition, it makes lenders feel more connected to their money because they can see where it is going.
Mr Alexander says that the innovative dynamic requires a leap of faith by the consumer. He believes that one of the major obstacles is “the need to build consumer trust in any category as new as social lending”. He says he expects consumer awareness of the benefits will continue to grow. One reason for that is that the only truly new aspect of the concept is the medium. The notion of people lending to each other without going through a bank “has been happening in communities and families for centuries”, he says.
Too stubborn to change
Still, old habits are hard to break. Forrester recently examined the channels that consumers prefer to use when they interact with banks, and its findings hold some lessons for banks contemplating a Web 2.0 deployment: the internet remains the most popular channel for banking, and the branch is most popular for service interactions. Furthermore, Forrester also found age and gender differences, noting that males prefer the internet and females the phone. However, “consumers of all ages [still] prefer to open a new account in the branch”, it said.
To make matters worse, according to one 2006 survey of more than half of Europe’s internet users, 80 million people have either given up on online banking or have never banked online. The resistance is due, in part, to a mix of poor service design, security fears, satisfaction with existing channels, and marketing messages that are not getting through. The only problem with Web 2.0 technologies – as powerful as they are – is that they may have difficulty reaching this recalcitrant segment of society.
Even when the technologies are firmly in place, some other means will have to be employed to draw the uninitiated into the fold. The only way to do that is to promise – and then reliably deliver – a seamless customer experience.
Some observers believe that Web 2.0’s ability to take hold so firmly in the banking sector is a reflection of the sector’s unique need to both reassure its customers and yet continue to exceed their expectations. “Banking is atypical as a vertically integrated industry,” Mr Alexander says. “It is now seeing itself pulled apart by marketplaces and intermediaries.”
New view of lending
Thanks to the empowering force of the internet, the question that consumers are asking is quite simple, he adds: “Are big, global, financial-product manufacturers really the best deliverers of a great customer experience?” he asks rhetorically, before going on to answer his own question: “Somehow, I doubt it.”
Mr Alexander, who has a vested interest in seeing banks struggle to a certain degree, says: “Social lending is now as inevitable as the bond market became for corporate debt.”
What it provides is a bond market for individuals, an eBay for money – and universal access “to many mums, dads, friends, or rich uncles who may be willing to lend or borrow”, he says. That communal experience is an outcropping of what Web 2.0 technologies permit companies to do in a marketplace.
Mr Alexander’s counterpart at Prosper, CEO Chris Larsen, expressed a similar sentiment in February, when he addressed his company’s loyal following at the first-ever Prosper Days – a kind of users’ conference for borrowers and lenders. Celebrating Prosper’s first anniversary, Mr Larsen noted with pride that the company had more than 175,000 members and had had more than $36m in loans.
He recounted his original inspiration, the realisation of what a sense of community – and a possibility for shame – can do to motivate a marketplace. “Why couldn’t technology and community finally democratise this market?” Mr Larsen asked. “We looked at what worked in America when self-reliance was a necessity of survival. We thought of the original building-and-loan societies…. And we kept coming back to the American capital markets – they worked so well, if you could just get equal access to everyone.” Thanks in no small part to the underlying technologies that made it all possible, peer-to-peer capital represented “a lending and borrowing market that had all the efficiency and fairness of these great capital markets, and all the openness and trust of these community movements”, he said.
The populist message of the level playing field can be contagious. “If there’s a niche in lending that can be exploited, let everybody exploit it,” Mr Larsen told the crowd. “Let everyone trade and prosper. Just like in the capital markets. That’s not exploitation, that’s opportunity.”
In the end, says Mr Alexander, the true impact of the new internet-based applications is that they all serve to empower the end user – the consumer – while taking out of the way one middleman after another. It is happening everywhere, and it simply happens to be financial services’ turn, he says: “Look at the impact that this type of technology application has had on vertically integrated record producers or packed tour companies. The banks will be next.”
