Might the consumer banking revolution be coming?
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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.