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?

Social Banking: Blessing or Curse?

While the topic of Facebook and banking has generated plenty of heat (though not necessarily a lot of light), the debate seems mostly focused on two broad issues: The much-maligned IPO, and the notion that the company might take business away from the banking sector, such as through Facebook Credits or a self-branded credit card.

The IPO, of course, continues to stir debate—just this week, it was reported that UBS AG, Switzerland’s largest bank (by assets) took a hit of more than $350 million, nearly half its entire second-quarter profit, on the ill-fated deal. (UBS now plans to join several other brokerage institutions readying legal action against NASDAQ). As for Facebook serving becoming a financial institution itself, the mobile payment system for third-party developers got a facelift recently, and there’s now a better subscription billing system.  However, speculation still seems further along than reality.

But there’s another strain emerging that might have even greater ramifications. This is where global financial services conglomerates enable individuals, and perhaps businesses, to do their banking via Facebook.

It’s not as if banks aren’t aware of Facebook—they all have a presence on the social network platform, and quite a few have built branded communities on it. However, that’s still more marketing than finance. What’s happening now goes quite a bit further.

Much of the early action seems to be coming from overseas. First National Bank of South Africa, ASB Bank of New Zealand and Commonwealth Bank of Australia are all launching apparently major initiatives to capitalize on ‘social banking.’ Essentially, the plan is to enable peer-to-peer (P2P) payments over the network between ‘friends.’ Of course, it almost certainly won’t stop there: It’s easy to envision a future in which virtually all consumer transactions, including bill payments, are done over Facebook, since just about everyone and everything is a member anyway.

For the record, skeptics are already out in force, warning consumers that blurring the line between a bank and a social network could bring serious problems. But it may be too late to put the genie back in the bottle. While somewhat smaller financial institutions can be perceived as risk-takers, Citigroup is something else entirely. That financial powerhouse is now asking customers whether they would do their banking via Facebook. It’s also been noted that JP Morgan Chase actually has more ‘likes’ on Facebook than Citi, and is surely looking for ways to monetize that advantage. Besides, as more financial transaction are conducted via mobile applications, the prospect of drastically altering banking practices doesn’t seem nearly so outlandish.

Looking ahead, it’s important to understand that any wholesale change in banking will not take place in a vacuum—Facebook will change, along with user habits, security measures, regulations, etc., before that happens. While it already counts a sixth of the world’s population as members, Facebook is still simplistic in terms of its interface and primitive in its technology underpinnings. Look at the typical user interface—there’s virtually no distinction permissible between different categories of ‘friends,’ or non-transparent and secure ways to do much business. That’s almost surely going to change.

Most consumers now do almost all their communicating via Facebook, just as social networking and social media are no longer separate entities but woven into every aspect of our lives. At some point, everything will become, in some sense, ‘social.’ The idea that banking can somehow stay immune is naïve. Instead of resisting it, let’s just do our part to make it easy, secure and profitable.

The Social (Payments) Network

While Google’s privacy policy and user-tracking have been under the microscope recently, Facebook has been quietly acquiring money transmitter licenses from state agencies around the U.S.

Is Facebook gearing up to battle PayPal and the ever-growing list of companies in the payments space? Are they just preparing for the increased scrutiny that going public will bring? Or, perhaps they plan to revolutionize the financial service industry with their more than 845 million users worldwide?

The point is no one really knows.

A recent article in American Banker shined a light on the social network’s recent activity with state regulators, confirming at least 15 states have granted money transmitter licenses to Facebook. Facebook already maintains a digital currency, Facebook Credits, for use with Zynga’s Farmville and some of its other online games. Point being: Facebook is well positioned to provide person-to-person (P-to-P) money transfers with real-world currency.

What would a Facebook-based financial institution look like?

Well a lot like PayPal actually, but with more traffic – people updating their status, posting pictures, checking up on friends, etc. P-to-P transfers seem a natural fit. Banks have begun to offer P-to-P and need to take Facebook seriously as a competitor. Bank transfers can be as easy and convenient as simply entering the recipient’s email address and the amount to be transferred. If you are already logged in to Facebook, it could only take several clicks, eliminating the need to switch to a bank’s site or PayPal.

Currently, advertising space is the only product sold by Facebook. It stands to reason Mr. Zuckerberg and company would jump at the chance to squeeze more revenue from his website’s users. Taking a small percentage of the P-to-P transfers would generate additional revenue.

Facebook collects information about users, their preferences and activities on their site, giving them a huge advantage over other FIs. Only Google comes as close to compiling as much user information.

The popularity of the payment space continues to surge with a seemingly never-ending line of companies ready to compete for a piece of the market. Case in point: Retailers Walmart and Target recently announced that they, too, will soon launch a mobile payment system. Starbucks and Subway launched mobile payment solutions last year.

Retailers like to provide payment solutions because it enables them to offer special deals to customers, avoid paying costly transaction fees to FIs, and provide greater security than a multiple vendor system. Perhaps most important is the additional information about each consumer, which can be culled and analyzed in order to maximize sales from each individual and thus increasing the retailer’s revenue.

Questions remain about if and how Facebook would handle basic banking functions like deposits, interest, and fees, but FIs would be wise to prepare for competition from yet another company.

Social Banking

The infographic from ZoneAlarm which we highlighted recently warns users of security concerns related to online banking and has an interesting ranking on online activities. It lists shopping at number one, followed by banking at number two, and social networking at number six.

Actually, this kind of ranking is obsolete. In the real world these activities are distinct; in the digital world, they blend seamlessly, and the sooner professionals in every field adapt to that reality, the better.

Take shopping. Real-world retailers have long been losing market share to their online counterparts, but there’s now a host of social media tools to help them to fight back. A new generation of shoppers—the one that goes shopping with an iPhone and a million applications—can be lured away from what they’ve been doing online.

You like a dress you see in a store? Tried it on, want to buy it? Take a picture, press a button, and there’s an application that tells you instantly how many stores within a one-mile radius has the same dress at a lower price. Perfect fit, instant gratification. Or let’s say you bought a dress last week, and you happen to walking past that store again—an in-store app senses you’re close by and sends you a text: “Thanks again for buying that dress last week. And since you’re so close, if you come in within the next hour, you’ll get these shoes, which match your dress perfectly, for 40 percent off.” Talk about impulse shopping.

OK, so banking isn’t shopping. But just one generation ago, when the Internet itself emerged, remember what it did to stock trading. The economy was bubbling over back then, a ton of dot-coms was galvanizing the marketplace, and people had money to invest. So everyone from Merrill Lynch and Charles Schwab to newer players like eTrade and ScottTrade got in on the action with a raft of online trading tools. Bottom line: people got into the market because they could, they did research because they could, they traded relentlessly because they could.

Social media represents the second coming of the Internet. Retailers, educators, service providers of every stripe are scrambling to offer applications that play to their specific audiences. In many cases, this means getting customers not only to what they’ve done before, but take advantage of entirely new capabilities.

So, a year from now, what will financial institutions enable their customers to do that they can’t do now? And which companies will be first out of the gate with exciting new capabilities? Let’s speculate.