Social Banking: The Upcoming Phenomenon?

Spain’s CaixaBank bills itself as the leading financial group in its market for both banking and insurance. It’s also just become quite interesting for another reason: It claims to be the first bank in Europe to develop and release a Facebook app that allows enables customers to check bank accounts and even conduct transactions via the world’s biggest social network. And just to draw a little more mileage out of the innovation, the institution will also support small donations to specific charities with this method.

All in all, this is a relatively small deal for now, but what are the chances it will get bigger in the near future? Here’s a hint: The bank will soon extend these services to include other operations, such as person-to-person payments, according to the bank. Other institutions are jumping on the bandwagon too: The ‘Pockets’ service from India’s ICICI Bank (incidentally also billed as a first of its kind) lets customers perform a range of services on this platform, from tracking accounts to sending money to ‘friends.’

Moving west a little, the banking industry in Ireland is also watching Facebook closely, but for somewhat different reasons. This is because just this spring, the global behemoth formally applied for a license from the nation’s central bank to become an e-money institution, giving it the power to issue its own currency. What this means exactly is still a little fuzzy, but some see it as perhaps a more legitimate version of Bitcoin. Speculation has it that the company will focus on remittances, a gigantic market in serious need of transformation.

For the record, even a corporation as traditional as Wal-Mart recently launched a service that enables unbanked consumers to transfer money. While that could worry Western Union, it’s likely a niche service for a niche market. Facebook, however, is another beast altogether—with its global reach and instant access, even a minor nudge could shake the foundations of the banking industry.

Facebook’s attempted strides into the financial services industry, however tentative, have been explored on this blog before, specifically with regard to Facebook Credits. That refers to the virtual currency members can use to buy virtual goods in any games or apps of the Facebook platform that accept payments. Even without getting extensive coverage, the practice earned prominent mention in the company’s IPO filing.

More recently, the company appears to have been moving away that strategy and towards money. In fact, it has been quite active for some time now in helping application developers work on payment processes that uses local currencies. In other words, like many good innovators, it has been hedging its best.

But if that’s what Facebook is doing, what are corporations on the financial services side doing to ensure they don’t come out on the losing end?

It’s easy to see why social media in general could be a boon for communications and a headache for everything else. J.P. Morgan, for example, recently fielded hundreds of angry Tweets after putting in place policies to identify potentially risky transactions. The thinking is that in the old days, when customers had to actually go online, or even draft a letter, when making a compliant, there were fewer complaints; now, when it can be done with a few stabs on the smartphone, there are far more coming in, and each expects a response.

Sure, most predictions about user adoption of new technologies turn out to be wrong. We have no idea which innovation will take off, what changes it will induce. But it’s probably safe to say that the army of social media channels, including Facebook, has changed everything, and it will change banking. Facebook is clearly doing its part to speed the process, and some banks are doing theirs. But are there many that should be doing more?

The Napsterization of Banking

There’s a documentary on the festival circuit right now (it played in a few theaters earlier this year) and, as Hollywood hype would have it, it’s generating buzz. Called Downloaded, it documents the stunning rise and precipitous fall of Napster, the independent peer-to-peer file-sharing service that allowed anyone and everyone to post anything and everything they owned in the audio world. The music industry has never been the same since.

Even back then, it was an anomaly. Most entrepreneurs were launching dot-coms with dreams of high-value IPOs, while Napster seemed to encourage outright theft with nary a profit in sight. It wasn’t even around very long—Napster effectively functioned only between June 1999 and July 2001—but in that short time it signed up millions of members, revolutionized the way most people get their music and serves as a giant milestone in the online world.

So what does all this have to do with banking? Ask Peter Sands, group chief executive of international banking conglomerate Standard Chartered and a long-respected industry veteran. In a new and much talked-about piece for the Financial Times, headlined “Banking is heading towards its Spotify moment,” he asks a distinctly uncomfortable but vital question: Will the rise of new technologies do to the banking industry what file-sharing services did to music and book retailers? (Hint: It destroyed them.)

While it seems like a stretch to link the intricate workings of the financial industry to unauthorized downloads of Lady Gaga, it’s really not. As the piece points out, actual money constitutes only a tiny fraction of financial services. Most of it has to do with deposits and mortgages, or information and transaction. In other words, it’s eminently ‘digitizable,’ just like the new album from Jay-Z. Technology has radically transformed every industry and every practice built around exactly these commodities, and the traditional pillars of those industries have paid the price (think Tower Records, or the Borders bookstore chain).

To be fair, the banking industry hasn’t been nearly as blindsided as the music business was back then. It’s easy to remember how the band Metallica showed up with reams of documents bearing the names of fans who had illegally shared their music, which clearly cost them in the currency of cool. A range of artists joined their record companies in burying Napster under a hail of lawsuits. However, they had nothing to replace Napster with, which is why other file-sharing services instantly took its place. Meanwhile, millions of fans never understood that they should actually pay for music.

In our business, banks have invested billions in not just back-end but customer-facing technologies and services, from online accounts and digital payments to customized mobile apps. Many large corporations have directly launched or otherwise funded startups to experiment with technology-based offerings. There is a clear understanding that the genie is not going back in the bottle. Customers expect a raft of user-friendly online services, and they expect to pay less for those, not more.

But the central question—has the industry really developed viable replacements for the old banking model?—is still searching for an answer. After all, we still have mostly the same corporations offering the same services, only now with a mouse click or mobile app. What exactly is new?

The answers won’t be easy to find, as the lessons of the music industry show. There’s a whirlwind of complexity here.

In the first place, Napster was terrible for music industry stalwarts such as retailers and studios, but it was great for independent labels and musicians, who were able to find an audience they wouldn’t have otherwise. For example, alt-rock pioneers Radiohead got their first taste of success via Napster, and went on to make big money by touring asking fans to pay whatever they wanted for a new albums. Services such as iTunes showed that fans would indeed pay a premium for music they like. Spotify, the company mentioned in the headline of the Financial Times piece, is a joint offering from major record labels and is seen as the new incarnation of music downloads—it doesn’t sell music, per se, but a subscription to a cloud-based service (and it’s already drawn the wrath of Radiohead for not paying artists enough). Even Napster might become a viable commodity again—far from its origins as a rebel outfit, it became an online music store, got acquired by Best Buy and is now owned by Rhapsody.

In other words, there’s no single model to replace what existed before—a clearly defined set of developers (the artists), manufacturers (the record companies) and distribution channels (the retailers). Now, it’s a constant shift with new platforms and distribution channels, while everyone involved just tries to keep up. That’s the way it is in the technology-driven world.

The single biggest difference between the financial services industry and the technology business may be that the former doesn’t change very much or very fast, while the latter does. That’s just one reason why there are constantly new platforms and paradigms emerging, and new companies frequently at the top of the heap. The banking industry surely deserves credit for changing as much as it already has in the Internet era. But if recent history is any guide, it needs to change a lot more.