Might the consumer banking revolution be coming?

By Felix Salmon
December 8, 2009
Yodlee (a firm you've probably never heard of), and Josh Reich, of i2Ď€ (a one-man consulting shop you're very unlikely to have heard of). But at the end of it both Josh and I came out with a sense that maybe -- just maybe -- we might be near the cusp of the long-overdue revolution in consumer banking that millions of Americans have been waiting years for.

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I had a fascinating meeting this morning with Anil Arora, the CEO of Yodlee (a firm you’ve probably never heard of), and Josh Reich, of i2Ď€ (a one-man consulting shop you’re very unlikely to have heard of). But at the end of it both Josh and I came out with a sense that maybe — just maybe — we might be near the cusp of the long-overdue revolution in consumer banking that millions of Americans have been waiting years for.

There’s no doubt that the present way that banks do business in America is broken. They make most if not all of their income from fees which overwhelmingly hit those who can least afford them; the payments system is insanely and anachronistically reliant on paper checks and the postal service; and they’re generally hated by the consumers they nominally serve. There’s got to be a better way — and indeed multi-billion-dollar companies like PayPal have sprung up precisely because America’s banks are so incompetent. “PayPal should not exist,” says Arora — after all, it’s not needed in other developed countries, where people can happily transfer money into anybody else’s bank account without either party paying a massive fee. But in America, the short-sighted desire to keep those transfer fees allowed the banks to concede the field to the dot-com upstart.

“The banks should have done it,” says Arora. “Why didn’t they? Because they weren’t asking consumer-oriented questions.” Today, the banks can’t dream of setting up a rival company to compete with PayPal, because PayPal has a huge directory of signed-up members and they don’t. The only thing they can do is give up their beloved transfer fees, and simply let their customers transfer money for the same cost ($0) as writing a check. After all, processing checks costs the banks much more than processing a wire does. But 80% of the bills paid in the US are still paid by check; next door, in Canada, 80% or so of bills are paid online.

What has all of this got to do with Yodlee? Well, Yodlee is the engine behind the online banking operations of most banks in America — and, for that matter, of mint.com. (I wrote about Yodlee and Mint back in September.) It’s built up an enormous dataset over the years — $3 trillion of transactions from 23 million users have been cleaned up and put into a huge database by 500 employees — and it’s now going to open up that database to software developers around the world. People like Josh will be able to write applications, or “widgets”, which will allow people do do things with their personal finances which until now simply haven’t been possible.

For instance, a company like BillShrink might build a widget to look at all of your bank accounts and give impartial advice on where you might be losing money, or missing out on the opportunity to make money. Or there could be some kind of payments widget, using the cheap ACH network rather than the expensive wire-transfer network, allowing people to pay each other easily without going via PayPal. Or a bank could set up a simple dynamic comparison tool, a bit like Progressive Insurance, showing how their rates and fees compare to anybody else’s. Or someone could build a new kind of scoring system based on assets as well as just credit history — as Arora notes, you can have a $10 million of cash in the bank, but any number of very normal snafus can still result in your having a bad credit score. Josh talked about building an app which lets you take a photo of a bill with your iPhone, and the widget automatically pays it on the due date. And then there are all manner of savings and investment and tax possibilities on top. There might not be 100,000 apps like there are on the iPhone, but a few hundred is a distinct possibility. Any of them could be offered by banks for a fee or for free to all the users of their online banking systems; all of them will be available on yodlee.com.

It’s the outsourcing of innovation, and right now might just be the perfect time to implement it. “We saw a huge traffic spike when the crisis happened”, says Arora, who’s convinced that consumers are more receptive than ever to the kind of message being sold by Ally bank: no hidden fees, lots of transparency, much more control over your money than you’ve been used to in the past, not just from computers but from mobile devices as well. At the same time, banks are looking to recoup some of the money they’re currently spending on their websites, which generally cost about $10 per user per month, thanks largely to crazy billpay systems which often involve sending paper checks in the mail.

Rather than trying to maximize the amount of fees they extract from each customer, smart banks might start trying to maximize the proportion of each customer’s financial business that they look after: most people keep only about 35% of their total balances with their primary bank. And with the transparency of the internet, it’ll be more obvious than ever which banks are worth using and which are the rip-off merchants.

Arora talked about the rate of uptake of personal computers from the mid-1980s to the mid-1990s: although the technology improved enormously over that time, the rate of growth of the user base never really took off. And then the internet arrived, and suddenly PC penetration skyrocketed. Maybe the advent of easy and transparent collaborative tools will be the precipitating factor which finally brings US banking out of the era of checks-in-the-mail and into the 21st Century — especially if the stick of improved customer satisfaction is combined with the carrot of a Consumer Financial Protection Agency cracking down on fee income. In fact, the CFPA might even build its own widgets designed to set off a red flag whenever a bank tried to offer a non-compliant product. Yodlee has all that information right now; it’s just that no one’s really using it. With the release of a set of APIs in January, all that will change. Almost certainly for the better.


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Felix.. Bravo! Seems like Yodlee will force this change much like Mint.com seems to be about to force change over brokerages and financial planners..

Posted by Ooh_La | Report as abusive

must be the laws, not the technology, no? because why couldn’t i just open an acct with an international bank — say hsbc or banco popular, which are prominent in nyc — and use the same payment tech they use in europe?

Posted by q_is_too_short | Report as abusive

The banks and insurance companies are all overdue. They will continue charging these fees until enough noise motivates legislation to change them.

Posted by Sygma | Report as abusive

Fascinating; though I think a good/better (future?) comparison may be Netflix vs. Blockbuster. One of them are the guys who charged you late fees, the other gave you what you wanted (but didn’t know it yet).

Posted by OurManinNYC | Report as abusive

I’m not sure what banks you spoke with but at mine, most income is not fees, but interest on loans. The fed controls how we process checks, which by the way is moving to electronic images. The Fed bank in our district, New England, does not accept paper anymore. As an office manager i would love to not have any overdrawn accounts ever again – they are a pain for bankers as well as the customer.
You state processing checks is more expensive than processing a wire – be careful of your language – a ‘wire’ is quite different from a Paypal transaction. A wire is done at Western Union, Walmart or your bank via the Fed Reserve system Fedline.
You also state 10 million in the bank and poor credit – two different animals. your cash in the bank is totally unrelated to how you manage your credit. I have customer that earn over $100K with lousy credit – pay your bills on time!!

And most of all – some of these sites/vehicles you mention for payment processing are loaded with fraud. I have several customers that have lost money on them, from $50 to $30K. Whatever system is used, it must be trusted by the user and also be responsive to customer complaints. ever walk into a Paypal office? but come into my office and i will help fill out the fraud affidavits and get your money back. try that online!

Posted by J-Inglis | Report as abusive

Banks and credit unions have become so sophisticated in driving up overdrafts that Americans now pay more in overdraft fees every year than they do for books, cereal, or fresh vegetables.

http://www.businessinsider.com/overdraft -fees-are-bleeding-americans-2009-10

Posted by raichle | Report as abusive

I agree with J-Inglis on most points, this won’t revolutionize how we pay our bills or anything like that. But the US system is definately behind the times, although it is probably due to legal issues or a lack of technology on the Federal Reserve Banks side, or a combination of the two.

I am an American living in England, and in my account here I can just enter someone’s sort code (like US routing numbers) and account number and send them money which they will receive within 2 hours, with no fees. That’s something you can’t do at J-Inglis’s US bank!

You won’t be able to transfer money easily to US accounts from a UK HSBC account, and you need a local utility bill to open one too (reason it took me over a month to open a UK bank account when I first moved here). So your idea won’t work, unless you have the $75,000 account balance needed for a HSBC Premier account.

Posted by terets | Report as abusive

I doubt this will ever become a reality – tools such as this would exert enormous pressure on financial companies that rely on exactly this information asymmetry to make money.

In the event such technologies did become readily available in the public domain, expect a concerted effort to squash them either by utilizing cartel tactics or simple lobbying of legislators to include various ‘security’ and ‘privacy’ provisions that would make such tools illegal.

Posted by AnonCoward | Report as abusive

I think when it comes to financial transactions or sharing private information my number-one concern is security. With all the issues involving online fraud and theft of identity on the net, I agree with J-Inglis that trust on the service provider is the most important thing.

Posted by mojojojo2000 | Report as abusive

I’m concerned that a behind the curtain company can compile detailed financial information of other people’s customers, and sell that to anyone who wants to make a profit off of it. This scenario seems to be becoming more of the status quo, but very few people are aware or concerned about it. I’m concerned because data can be lost, stolen, and abused. Even in the best light, I don’t trust corporate America to use my financial transaction information for my benefit; rather, I have every reason and proof to believe that they will use the information to get their hand in my pocket somehow. Doesn’t the Constitution guarantee my right to be secure in my personal effects? The time for defense of this essential freedom has come due.

Posted by Soothsayer | Report as abusive

I do agree that banks are stuck looking only at profits from services where they should be making good loans. One thing that we must get away from in banking is having the Government dictate that they must make loans to high risk people. This is not the way to improve banking and the housing collapse shows that this also was true in the mortgage business. If we want an efficient low cost banking system we have to level the playing field where good credit risks do not have to compete with poor credit risks.

Posted by fred5407 | Report as abusive

It is clear that banks have become parasitic to economic development as they are run today, they depend on mistakes, pay no interest even though they are charging interest and still have problems.

Banking is where the crooks went because that is where the money is, add the sense of entitlement and low moral character that follows most Ivy Leaguers into the workforce and you have a slow motion robbery of American workers wealth.

Posted by jstaf | Report as abusive

The evolution in banking has been consolidation, ie bigger banks controlling more area, customers, etc. FACT: The top 5 banks, ie C, JPM, Wells, etc control 40% of deposits! So, clearly control is skewed in favor of the big boys. Everything there is about profitability and share of wallet. Banks are NOT altruistic! Recent news articles on mortgages, NSF/OD fees, credit cards tell you banks are opportunists out to make a buck while leading you to believe they are doing you a favor!

Yes, the technology is there. ACH, bill pay, recurring credits and debits “could” enable you to move $$ at will among banks and companies if the banks wanted you to have access. The functionality exists!

Yes, banks look to lock you up by getting you to subscribe to multiple services, realizing the more you have the less likely you’ll switch as it is too difficult to “undo” and “redo” all the linkages you have set up. So, like anyone else they leverage their market share, expertise, strengths to deepen their market penetration and hold on your “relationship.” It isn’t in their interest to “enable” you to choose the “best” products / services available within the industry. You are a captive and they want to keep it that way.

Posted by Gorm | Report as abusive

ING’s Electric orange has been doing alot of this stuff for years. You need a local bank to deposit paper checks, but everything else is handled online. No fees, you use atm’s at 7-11′s and walgreens, and no charge for for moving money around from the other accounts. I haven’t paid a bank fee in 2 years …

Posted by duffmeister40 | Report as abusive