7 years ago exactly today, Steve Jobs introduced the iPod, a 5GB HDD stylish music player.
Looking back, this was one of Apple boldest strategic moves and one of its most successful as well. It’s good to look back at the choices they made and wonder what the equivalent would be in the financial services world.
- They identified a large non-speculative market with no market leader (music).
- They laser-focused on a “quantum leap” value proposition: “your whole music library in your pocket” at a fraction of the TCO per song provided by other products.
- They chose the best technology they could find to power this value proposition: thin HDD, fast-charge long-lasting battery, and fast uploading FireWire link.
What could be a comparable innovation in financial services and where could it come from? Here’s my take.
- Large market: personal money management
- Quantum value proposition: complete peace of mind
- Technology: real-time access by the service provider to any financially-relevant information about you (expenses, assets, liabilities, goals, etc.) and automated creation of a sound and realistic plan.
I know some will strongly disagree with me, but my feeling is that just like the iPod didn’t come from an established music label/distributor, the iPod of financial services may not come from an established financial services provider (just like music labels/distributors, financial services providers are too busy these days to save their business models).
That does not mean it will come from a start-up either. The key will be to leverage an established trusted brand, and establishing a trusted brand requires much more than a top-notch team, VC money and unique technology and value proposition.
Looking at the consumer perspective, it seems to me that there is currently a stronger-than-average interest in trusting a single brand for a given problem, and leaving it to them to make the choices for you (and focusing on what you do best). Yes, Windows lets you decide where to put your application money, but for most computer non-geeks, less choice is more.
Financial Services are a bit like Windows these days. Many choices are offered but consumers feel they are left to decide what’s best for them in a world they don’t understand.
To come back to my comparison to the iPod, many consumers don’t want to have to know where to click, which audio file formats to use, which software to use, where to shop, etc. they just want to enjoy their music. I think a similar comparison could be made with money: most people don’t want to have to know where to invest, what to save, how big a loan they can afford, etc. They just want to know that whatever money they have they can enjoy the most today and tomorrow.
At a recent mobile conference (Mobile Web Wars), Michael Arrington said: “people are always willing to give away their privacy for value”. This is a thought that came back to my mind as I was recently reading Lending, with a Twist, an article describing one of Khosla‘s investments: On Deck Capital. On Deck essentially reduces the risk with loaning to small businesses by tracking their business on a daily basis, which is a much better measure than a credit score that is always lagging valuable creditworthiness information.
Reading about On Deck made me think that there was no similar financial service where consumers would voluntarily give their full past, present and future estimated financial picture to a third-party in exchange for true peace of mind. This could probably be done without even switching completely away from existing financial services providers, just as companies like Mint.com or Wesabe allow you to get a better understanding of your finances without swithing to Mint bank or Wesabe bank.
But to bring true piece of mind, such a service would have to go much further than giving recommendations and it would have to be backed by a highly trusted brand, with a value proposition backed by a wide portfolio of investments giving it preferred access to a wide variety of goods and services. This type of peace of mind used to be provided by large enough corporations to their employees, but it seems that such a responsibility is to heavy to bear for any a single industrial company, so it would have to be provided by some sort of conglomerate (companies have put in place strategies to focus on what they do best, but ironically that leaves most of us with less time to focus on what we do best). I don’t really have any name in mind, but Berkshire Hathaway may be the closest one I can think about.
Is this a crazy idea?
Interesting – I guess it's like being a “trustafarian”, with a trustee basically in charge of your affairs. Enough people supplying “all” their data might also improve the predictive quality of consumer credit reference data. But the devil is in this concept of “complete peace of mind”. What does it mean in practice? Do you really want it? If set up appropriately or prudently, the service might merely bring you a dull sense of certainty, or even doom. It could make you “feel” you're in a straightjacket from the start. Will it tolerate discussion or override, or will it present you with decisions or restraint. “Yes, sir or madam, I know that on a three year outlook you can afford a Maserati, but on our five year view of your affairs we're thinking more the Prius”. “Sorry, old boy, Asian stocks are about to tank, we're auctioning the Bentley at 3pm”. And how sympathetically will this trusted entity really be able to treat you when your circumstances change over time, e.g. unemployment, divorce, illness, death in the family and so on? I'm all for a more personalised financial experience, but the all-knowing trusted entity could present us with a pretty joyless life experience, even if financially it achieves a “better” result.
Simon, thank you for your humorous examples. It indeed raises some interesting questions. I think helping people reduce the vast amount of options to 1-3 options per major decision (buying/selling a car, buying/selling a home, etc.) based on their preferences and circumstances would be pretty valuable, if possible.
I was also thinking that if such an all-knowing service can't promise such peace of mind, why do financial services marketing messages is so focused on that today showing us retirees on their yacht and families having fun in their new house. I think financial services (banks, insurance) already give us a false sense of security.
Perhaps then, the future would be for a service to actually be more/fully transparent with regards to risks involved. Certainly, P2P lending is one such service where the direct connection between people removes this abstraction, which is usually the source of our false sense of security (“someone must be taking care of it”)
Yes, it turns out banks do give us a false sense of security. If you panned back from those laughing retirees on their yacht, it would probably show a reef looming dead ahead. So they won't get away with positioning themselves as, say, sonar equipment to help you navigate the reef ahead. And any claims of 'transparency' won't cut it either.
As a prediction for 2008 (following the demise of Northern Wreck in '07) I blogged that banks will only be the back office, not the front office of financial services 2.0. Too many other retailers command customer loyalty now, and the banks' last value claim – safety – has vapourised. Instead, consumer finance and other payment services will become fully integrated step in whatever retail or P2P activity you're engaged in. There'll be no need for all the murderous fees that banks charge or other profiteering, because the finance/payments piece will be only one small part of the retailers' overall volume equation and tied up in the value proposition to consumers. That's not to say that I was being particularly prescient, I was merely highlighting an emerging trend. But it's interesting to see it play out, with Tesco's purchase of its JV with Royal Bank of Scotland, as a significant example. Extending the retailer's brand to investment and other products, like share trading, will follow. The retailers will have a vested interest in keeping the bank service providers “honest”, to protect their much broader, higher value customer relationship.
About your prediction of banks becoming back-office processors, I agree although I know some have been making this prediction for the last 10 years. This is a long process in the making. Perhaps this crisis will be the tipping point. It is clear to me though that the über-banks resulting from the government-initiated mega-mergers will struggle to provide high-touch customer service.
I agree with you that retailers who have excellent relationships with their customers have a unique opportunity here. I think a retailer that would cover a wide range of products/services could effectively decide to invest in its customers, fronting the bank and issuing a much more credible investment story of “we want you to buy from us, today and tomorrow”. Re: Tesco, something of interest to me (given my interest in complementary currencies) is Tesco Vouchers (http://www.tesco.com/clubcard/clubcard/)
I would also think that cash-rich manufacturers of goods/services have an excellent opportunity as well. A company like Apple or Microsoft might find it opportune to more than ever trade credit for their products against applications developed for its platforms or music/movies made on its computers/software. I don't think this practice was unusual of successful firms during the Great Depression.
Indeed, that's how GE Capital got going in the '80s, and I guess GMAC. But it's interesting to see where such manufacturer initiatives have ended up – the expansion beyond financing the sale of own products into direct retail credit, mortgage and insurance appears not to be sustainable. The finance piece becomes too unwieldy – at scale, success risks the group being valued as financial institution, and a credit risk or insurance disaster could put the whole group at risk. Nice ride while it lasts, though.
Indeed, that's how GE Capital got going in the '80s, and I guess GMAC. But it's interesting to see where such manufacturer initiatives have ended up – the expansion beyond financing the sale of own products into direct retail credit, mortgage and insurance appears not to be sustainable. The finance piece becomes too unwieldy – at scale, success risks the group being valued as financial institution, and a credit risk or insurance disaster could put the whole group at risk. Nice ride while it lasts, though.
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