If it takes gangsta rap to spark fresh interest in the intersection of investment banking and technology, then so be it.
The ongoing fascination with Apple’s $3 billion purchase of Beats Electronics is entirely understandable, because it’s a cool story. However, it also says a lot about what’s going on between finance and tech.
On the one hand, there’s Apple, a company that’s become synonymous with innovation and raging success. It wasn’t always this way: the technology pioneer went through some serious lows, especially compared to archrival Microsoft, before reemerging as a consumer electronics giant that now has $160 billion cash on hand, nearly to be precise. And then there’s Beats, which makes audio products and offers a listening service. The company’s had some diverse owners: One is the Carlyle Group, the asset management powerhouse, whose executives have included the first President Bush, his Secretary of State James Baker, the former Prime Minister of Thailand, and a raft of financial services, business and media luminaries. But overshadowing them all is co-founder Dr. Dre, who earned early fame with gangsta rap, which of course drew the wrath of the Bush administration.
But putting aside the strange bedfellows, the high-profile deal offers a good reason to take a fresh look at the moribund investment market. To be sure, it turns the spotlight on many key elements in this market—the consumerization of IT, evolving drivers for content adoption, changing tastes expectations in key demographics and the premium placed on innovation and marketing (not always in that order).
However, as PC World points out, this is not the only silver lining in the cloud. In fact, to stretch the metaphor, cloud technology—along with software-as-a-service (SaaS) and mobile offerings—is fueling a strong drive in tech mergers and acquisitions.
The Global Technology M&A Update from EY (previously known as Ernst & Young) reveals that a curious blend of opportunity and disruption—two cornerstone elements of the tech market—came together to boost global technology M&A aggregate value by a staggering 65% in 2013. The number shot up to, $188.2 billion, which clearly hearkens back to the glory days of the dotcom bubble.
To be sure, global technology M&A volume actually declined for the year, but cloud and SaaS registered a spike—a hint as to where the future is headed. Big Data remained almost as big, with advertising and marketing technologies—packaging analytics and social networking—nudging deal volume. Security and health care IT (which often seem to go together) moved along as well. The folks in our line of work had good times too—financial services technology drove value to the tune of some 100 deals.
And while all this represents a look back, the look forward is nice too. The Apple-Beats combo aside, the first quarter of 2014 saw considerable activity in M&A circles, which is unusual for this period. The most recent report from PriceWaterhouseCoopers points to 57 deals closed in the first quarter, up by more than a third over same-period 2013. More specifically, many technology companies have not yet adapted their offerings to mobile, cloud and SaaS models, at least to the extent possible. As these pressures continue to mount, look for more wide-ranging deals to fuel technology M&As.
Any comparison to the raging market of 20 years ago—when dot-coms with no profits or even revenue received massive valuations from otherwise perceptive investment bankers—are not only premature but grossly unfair. But just as technology and finance have always boosted each other’s fortunes, it’s good to keep a wary eye on this market, even as it offers reason for optimism.
Image courtesy of Monster Cable Products, Inc., via Wikimedia Commons
We hear so much these days about the dominance of mobile banking these days that the occasional nugget of news pointing the other way can serve as a reality check. Try this: Fewer than one in four consumers say they would use their smartphone like a credit card to make payments, even if they had the relevant app. That’s the word from our cousins across the pond in a new survey of U.K. consumers conducted by YouGov on behalf of outsourcing firm Firstsource Solutions.
It’s not as if there’s a technological deficiency at play here—more than a third of the respondents have already downloaded mobile banking apps, 70% of them like really like what they have and almost as many use those apps at least once a week, usually to check balances or make a transfer.
So why is there such strong resistance at the other end? Is there a whole population of Luddites that we need to persuade? The survey does offer some answers. Fully 80% of the naysayers cite security as the primary obstacle—basically, that their personal financial information will be compromised. (On an unrelated note, one in five say they’re worried about their battery running out.)
There’s no question that data security is a huge concern. The non-stop headlines over government spying, periodic stories about high-profile breaches at big-name banks and retailers and the constant sales pitches for new security products all play a part in undermining consumer confidence. Without that confidence, it’s very difficult to induce large-scale behavioral changes.
In a sense, it’s like bumping up against the ceiling. The early adopters will take quick advantage of emerging capabilities generated by a flood of new technologies, and a large number will join in gradually. But then there’s a limit—beyond that, it takes dedicated, broad-based and ongoing campaigns to lure the unconvinced. In some areas of technology-enabled banking, we may be there now.
In this context, it might instructive to look at markets where technologies and economies have grown together, in essence allowing mobile capabilities to leapfrog traditional methods since they weren’t there in the first place.
For example, it’s now being reported technology firms expect a boom in anti-money laundering software within the next year. That’s because, following a spate of media reports, the Reserve Bank of India recently fined 22 banks for flouting regulations and issued cautionary letters to seven more. This is a market that began an experiencing massive economic growth at around the same time as easy-to-use mobile and other forms of IT were becoming mainstream. Many consumers opened their first bank accounts through new technologies. Now we’re in the second phase—more mature practices with greater security and regulations and less potential for fraud.
But here, too, there’s a big picture to consider.
Over the last couple of decades, for good or bad, technology has been at the core of most changes in the banking industry. As industry analysts have observed, the current migration to cloud computing enables better cost control, eases scalability and and lowers operational risk. But if it’s good for the institution, does that automatically mean it’s good for the individual?
The industry faces enormous changes in the months and years ahead. As Bill Michael, EMA head of financial services at KPMG, said to attendees at a conference recently, “There is a new trajectory and it is one where universal banking doesn’t exist as it does today, where retail and investment banking may be split and where the interests of countries, and their banks, come first.”
A lack of sufficient confidence in mobile banking security is just one sign of potential problems. In this environment, technology needs to serve as the bridge between the largest conglomerates and the lone consumer. We need to get it right.
When it comes to mobile banking, it’s hard to pinpoint something new because there’s always something new. Every week, financial services and technology companies alike put new apps into the marketplace. Many seek to replace or otherwise improve on what’s in place now, while others try to come up with entirely new functionality.
Still, it’s important to monitor key milestones and emerging trends, and that’s just one reason why the news this week about Numbrs is quite interesting. In fact, there might be 3.8 million reasons, since that’s how many dollars its backer, Centralway, just pumped into it to prepare for a U.S. launch. The new cash infusion follows a $7.7 million investment the same backer has committed to making in Numbrs for a push in Germany, and there are also plans for a major invasion of the U.K. market. (Sticking with the international flavor, Centralway is Swiss.)
So what is it about Numbrs that generates this kind of multi-market enthusiasm? It’s essentially a dashboard, not unlike Mint.com, that enables users not only to track or even predict their spending, but also conduct transactions and pay bills from within the app. Perhaps more interestingly—and this is where potential revenue streams may lie—it boasts of having the ability to predict future spending patterns. That’s surely a powerful lure to data-driven marketers.
On a completely unrelated note, technology provider Backbase, which bills itself as the Bank 2.0 portal specialist, this week added to its portfolio with software for commercial banking. The portal, which is sold directly to banks, features an all-purpose dashboard that’s fully personalized and enables users to work with every kind of existing app on every popular piece of hardware, from smartphones to desktops.
Sure, nobody’s talked about portals in the past 15 years, and dashboards aren’t supposed to be cutting-edge either. But these slightly retro concepts, and others like them, do point to subtle changes in the market. Essentially, they acknowledge that users will draw on a variety of apps from a variety of developers, regardless of the financial institution they count on, to do what they need to do. It’s up to the banks to accommodate them, rather than insisting on pushing their own products exclusively.
In this regard, the nature of the user demographic is very significant. The new xAd/Telmetrics Mobile Path to Purchase Study, out this week, shows more clearly than ever before which way the market is headed. To put in bluntly, the millennials dominate: Almost half of all mobile bankers are younger than 35, and a third cite their smartphone as the most important device for banking.
The numbers are clearly telling: Nearly two-thirds of these younger bankers relied on their devices throughout the transaction, from research to conversion. Even more, nearly 75%, say they noticed the mobile ads that popped up during the process. Bottom line: Nearly half of all online banking transactions now take place via mobile devices.
It’s easy to get rattled not just by the changes but the pace at which they’re occurring. The banking world has long counted on stability, longevity and loyalty, while the technology industry delights in going from upstart to legacy seemingly overnight. The regular flow of new apps with new capabilities, all of which have a direct effect on user behavior, seems designed to reward fickleness. But that’s the price we pay for the constant pursuit of innovation.
The new generation of core banking customers is accustomed to convenience and instant gratification, regardless of where they get it, and it’s up to the financial services industry to keep up. The flow of apps isn’t going to be cut off anytime soon, and platform technologies and methodologies, not to mention revenue models, must be broad enough to encompass them. Those that do it right, whether with innovative approaches like dashboards and portals or newer alternatives, stand to do very well.
Like many others in the industry, we’ve long been fascinated by the intersection of banking and technology. For example, we’ve wondered why the ‘disruption’ brought about by new financial products causes mayhem in banking circles, when the same characteristics win lavish praise in the tech world. We’ve tried to monitor how new technologies, such as the plethora of mobile apps, or speech recognition, or even hardware and different form factors, are radically transforming routine banking practices. More than anything, we’re always waiting to see how these worlds can come together even more—specifically, how technology providers can become banking industry players.
This brings us to the curious case of Liberty Reserve.
Let’s be clear: Fraud of any kind exacts a serious toll. Investigators say this global currency exchange, which has now been shut down as the result of a multi-agency pursuit, involved the laundering of some $6 billion—all of it real money, some (perhaps much) of it representing real crime, which is never victimless. According to prosecutors, this case apparently involves everything identity theft to violent gangs. Liberty Reserve may even have been the ultimate hub of the criminal underworld.
While this story continues to arouse considerable interest (only a few details have been made public so far), some of the strands are already fascinating. First, this was an enterprise that operated on a massive scale, with the core functionaries working out of sites in far-ranging places such as Malaysia, Russia, Nigeria and Vietnam. It’s alleged that there were 1 million users worldwide, with almost 200,000 in the U.S. alone. Founder Arthur Budovsky , who is now in custody, was a former U.S. citizen who had taken up residence in Costa Rica and was arrested in Spain. However, despite the gargantuan scope, the entire business flew under the radar. It’s hard to find almost any information about this multi-billion dollar network before it came crashing down.
That leads to the second fascinating element in this story. Money-laundering is almost as old as money itself, but almost every aspect of this operation depended on technology. To get in on the action and move money around, users needed nothing more than an e-mail address. Liberty Reserve’s network provided the cloak of anonymity without the threat of oversight or even regulation. Some have compared the ease of conducting illegal transactions to the way “PayPal revolutionized how people shop online.” Announcing the shutdown and arrests, Preet Bharara, the U.S. attorney for Manhattan, called it “an important step toward reining in the ‘Wild West’ of illicit Internet banking.”
Naturally, this has many now pondering other forms of Internet banking, and the first name to come up is Bitcoin. To be clear, that’s a very different business, and it’s widely believed that legally pursuing the network—which doesn’t have an operating hierarchy per se—would only drive it underground and introduce more criminal elements. However, the practice of transmitting funds internationally without needing to offer any identifying information does raise concerns.
These issues take on even greater urgency given the central question: Can companies primarily associated with technology become de facto or even full-on banking institutions?
Just this week, speaking at the Group 100 Congress in Sydney, Australia, Commonwealth Bank chief executive Ian Narev spoke of the potential threat from “the Apples, the Googles, the Samsungs. . .who can pick particular slivers as a result of the application of technology into financial services and compete.”
We’ve all seen some early signs: The introduction of Amazon Coins as a “new currency for Kindle Fire,” the launch of Facebook Credits, and Apple’s announcements that it has more than 400 million active iTunes accounts worldwide, all linked to credit cards. There’s surely more to come.
Technology and banking are now so intertwined that some kind of union seems almost inevitable. The saga of Liberty Reserve should serve as a sobering counterpoint that there’s more to banking than just using technology to move money around.
It’s almost an article of faith that when it comes to technology, the financial services sector is ahead of most other vertical markets. The industry resides at the critical intersection of money and information, and for that reason alone—let alone compliance, security, competitive pressure, etc.—staying at the edge is critical. And of course, by just glancing at the budgets many Wall Street titans work with, we can get a sense of the enormous commitment.
However, as a recent piece in InformationWeek makes clear, the reality is quite different. The IT budgets are somehow both colossal and constrained, hampered by everything from tight markets to increased regulatory pressures. As a result, while many of these corporations might excel at developing and releasing new market-facing applications and other tools, they’re functioning with 40-year-old legacy architectures.
In the past couple of decades, this highly sensitive arena has seen hundreds of mergers and acquisitions, and chief priority has been integration—finding or building common layers between vastly heterogeneous infrastructures. It’s surely expensive to maintain, but would be even more costly to replace.
That said, major changes are virtually unavoidable. The operating environment has undergone seismic shifts in just the past few years. Tech-savvy consumers have a plethora of tools—and competitive options—at their disposal, and re ready to take full advantage of them. For their part, institutions must be able to offer a seamless customer experience during transactions that are initiated with, say, a mobile app and completed inside a branch setting. This mandates a back-end infrastructure that can handled wildly divergent technologies. Those institutions that can’t handle it are destined to lose business.
And who they might lose business represents a very different, yet equally significant, aspect of industry transformation. For a very wide range of services, old-line banks are no longer the only game in town.
As many industry observers make clear, there’s a banking revolution taking place, and it’s got nothing to do with the Occupy folks. It’s from a new generation of technology entrepreneurs who see a market that’s primed for change, and they’ve for the technologies to do it. Aggressive startups such as Billfloat to GreenDot are not financial services institutions in the traditional sense—they’re really tech players whose core product happens to involve the handling of money. In the process, they’re perfectly positioned to service millions of individuals whose needs revolve around speed, flexibility, convenience and customization, all of which come from agile technologies and new-wave innovation, not lumbering titans with legacy infrastructures.
This surely plays to some simplistic stereotypes, and it’s unfair to paint every major financial service firm with the same broad brush. But the reality is that with the broad-scale development, implementation and adoption of greatly empowering financial tools and technologies, the divide between individual and institutional has become a chasm. There’s an entire generation of potential customers that doesn’t see or at least appreciate the credibility built up by longtime banks and other financial services providers. They want instant gratification of the kind that only tech-savvy institutions can offer, and pedigree matters much less than it did before.
The ever-present industry shakeout might yet reach a phase where larger banks rely almost entirely on B2B services built around consolidation and size, while younger and nimbler enterprises with a mix of technology and moxie compete for consumer business. Of course, that leaves many current institutions that don’t fit into either category out in the cold. It should be interesting to watch.
Think financial services and technology—the two industries have so much to do with each other, yet in some ways they couldn’t be further apart.
To see that strange level of symbiosis, you need look no further that the testimony offered by Paul Volcker, former chairman of the U.S. Federal Reserve, to a British parliamentary commission recently. In sum, Mr. Volcker is distinctly unimpressed by much of the “innovative financial engineering” found in capital markets these days. He believes that unless things change, financial institutions will commingle their accounts with the retail side of the business, and that will cause broad-scale problems.
Long lionized as an elder statesman of the industry, the former Fed chairman is widely credited with holding down inflation during his long tenure, and in that time earned praise (and some criticism for his regulatory stance) from both sides of the political aisle. Even in his ’80s, he led what was then called the Economic Recovery Advisory Board (now known as the President’s Council on Jobs and Competitiveness). Most famously, he is the force behind the Volcker Rule, a section of broader regulation that restricts U.S. banks from making certain investments that don’t benefit their customers.
So why is someone so visionary opposed to “innovative financial engineering?” This is perhaps where the chasm between technology and financial services is widest.
Think about it: Every corner of the technology industry thrives on innovation, and it is always understood that there’s a price tag attached. The new inevitably replaces the old, whether it’s a smartphone upgrade or an entire platform shift. In fact, ‘old’ is a relative term, since there’s always a next big thing or a new/new thing just around the corner. And we all want it that way; this is an industry where ‘disruptive’ technologies get complimented and bankrolled.
It’s not that the issue of regulation doesn’t come up occasionally—the government has certainly kept Microsoft’s lawyers busy for a long time with antitrust concerns, among other examples—but by and large new companies emerge by dint of merit and proudly take on a leadership position. That’s how it was with Microsoft, Google, Facebook, Apple and many others. Even the industry’s brightest minds have no idea what the next name in that pantheon will be; but you can bet that whatever technologies it offers will be not just innovative but disruptive. They’ll prompt (even force) everyone else to change, and that’s a good thing.
The one constant in all this change is that somehow, while the new gadgets and capabilities are always better and faster, they’re also cheaper. New companies and new technologies—all innovative, many disruptive—emerging on a regular basis, radically enhancing the entire landscape while cutting costs: How many other industries can we say that about? Financial services?
Well, these upstart start-ups couldn’t exist without financing, as the fine folks on Sand Hill Road in Menlo Park, the Flatiron district in New York and other hubs of venture capital can attest. There’s also tremendous risk involved; for every one Facebook that generates billions and changes the world, there are many that go nowhere. But still, the stark difference is the way the two industries operate (and are judged)—innovation and disruption is great in one and perilous in the other.
While there’s plenty of action at lower levels, most of the names at the top of the financial services industry pyramid have remained unchanged for decades. The only changes come when some conglomerate merge, or venerable companies go under through too many bad investments. For the most part, what we see now is what we’ve seen for a long time.
Mr. Volcker surely has a point about innovative financial engineering gone bad, but are there alternatives? Will stability in the financial services industry always mean essentially the same set of companies making cautious moves, while the technology side exercises rampant creativity to shift the paradigm regularly? Or can each industry learn more from each other?
What do you think? Let us know by tweeting at @bankingdotcom or posting in the comments below.
*This post originally appeared on MyBankTracker
In the past year, countless prepaid cards have flooded the nation to target the large portion of the American population that is either unbanked or underbanked. Acknowledging that the market for these alternative financial products is rapidly growing, more tech companies are catering to this group of consumers.
According to a recent survey by the FDIC, in 2011, 8.2 percent of U.S. households do not have bank accounts, up from 7.6 percent in 2009. And 20.1 percent of U.S. households have bank accounts, but rely on alternative channels for financial services (e.g., check-cashing, payday loans and money orders), up from 18.2 percent in 2009.
Even traditional banks have jumped on the bandwagon to compete against non-bank prepaid-card companies and get a piece of the prepaid-card market.
Last fall, Regions Bank started rolling out asuite of products and services that included a prepaid card and check-cashing and Western Union services. In July, Chase, the largest bank in the country, launched the Liquid prepaid card that does almost everything that a regular Chase checking account can do.
“As banks have steadily inflated the cost of banking, more and more depositors are seeking substitutes for bank accounts with escalating costs, high minimum balances and surprise fees,” said Jim Wells, president of Wellspring Consulting, a firm that specializes in solutions for the unbanked and underbanked.
But, with the proliferation of financial technology, the focus is shifting to serving the unbanked and underbanked through mobile devices.
Last week, at a Finovate conference, two companies demonstrated their versions of a mobile wallet for the unbanked or underbanked consumer.
The CAT (Cash and Transact) mobile wallet, by Emida, is an app that is based solely on the consumer’s smartphone. Through participating retailers, users can refill their CAT accounts with cash (for a convenience fee of $1.50). Then, they can use the funds to pay for purchases through the app.
The Flip mobile wallet, from PreCash, is an app that allows users to perform instant mobile check deposit and make expedited bill payments — two services that were never before available on a prepaid card account.
“Although these mobile-enabled, prepaid card-based accounts are attractive to far more than just low-income consumers, one key to success will be in making the services available via even the simplest of mobile devices,” said Wells.
In countries where financial institutions are hard to come by, mobile devices are the preferred channel for financial transactions. For example, more than 17 million mobile subscribers in Kenya use a mobile-phone-based money transfer service called M-Pesa, which enables users to deposit and withdraw money, pay bills, buy phone minutes and send money to bank accounts or other users.
In the U.S., the decreasing cost of smartphones may make it seem like everyone has a smartphone — but non-smartphones are still the most common mobile devices among the low-income population.
According to the Federal Reserve, 64 percent of the unbanked have access to a mobile phone (18 percent have a smartphone) while 91 percent of the underbanked have access to a mobile phone (57 percent have a smartphone).
Regardless of the types of mobile devices, the demand for alternative financial products and services is there.
And, history tells us that unbanked and underbanked consumers could be the users of the next wave of financial innovation.
In last year’s fall Finovate conference, card-linked offers made regular appearances on stage. Since then, card-linked offers became more available to bank customers. Bank of America, Capital One, American Express and many other financial institutions began providing card-linked deals.
Considering that the conference offers a good idea of what products and services we’ll see in the near future, it wouldn’t be a surprise to find that, by this time next year, there are more prepaid card accounts and other financial services that live on mobile devices.
What are you offering your customers? Let us know in the comments below!
For the majority of businesses, IT is a DIY proposition – do it yourself. That’s because most businesses are small businesses, which makes information technology decision-making at the Mom and Pop shops a DIY affair, far different than their larger business counterparts, where procurement is a managed process.
While the mechanics of technology decision-making for SMBs differ from those at large enterprises, their early embrace of the “Bring Your Own Device,” aka BYOD, strategy has lessons for the industry as a whole.
Try replacing a small business employee’s iPhone with a business-friendly BlackBerry and see how far you get. Chances are employees are using their own phones on the job. This consumerization of IT, in which consumers bring their own devices to work, is increasingly the rule at SMBs, not the exception.
This raises many questions for employers.
- How can I connect these devices to existing services, including email and payment processing?
- How can I protect against loss or theft?
- How do I make sure company data doesn’t leave if the employee finds a new job?
The costs associated with these questions sound extreme, but the benefits of a BYOD strategy will, in most cases, more than offset the costs. Not surprisingly, when employees use devices they like and have chosen for themselves, they’re happier.
And there are hard savings as well. By putting employees in charge of their technology, a BYOD strategy also shifts the responsibility for managing and maintaining – and in some cases, purchasing – that device to the user, reducing the overall company’s technology costs. The small business that lets its people use their iPhones is the small business that doesn’t have to buy them corporate devices.
Aside from the discussion of benefits and downsides, a bigger question remains: Why is BYOD so popular?
The answer lies in a simple but infrequently acknowledged truth: Most business technologies deployed to users aren’t designed for users. They’re designed instead for buyers, whose agenda is far different than their individual employees. For decades, enterprise technology vendors courted CIOs, IT managers and other buyers with promises to make their life easier: automate deployment, ease the pains of management, and lock down individual devices so that users required permission to install even a new browser. The user experience, the interface’s aesthetics and any functionality not directly related to the business were afterthoughts, if they were thought of at all.
And then everything changed.
Five years ago this past January, Steve Jobs unveiled the iPhone, forever transforming the way we communicate. For the first time, users had a device that was designed not for the employer and not for the carrier, but for no one other than the person using the device.
With its first mobile phone product, Apple not only leapfrogged every other device manufacturer on the planet, they completely reset users’ expectations. No longer would we have to settle for a device that was clumsy and awkward to use – which described virtually every device built for businesses. Users revolted and embraced, and today you see iPhones, iPads and dozens of other consumer-focused devices tacitly, even explicitly, supported within the enterprise.
For the businesses, then, the lesson is simple. Think carefully about who your customer is and who you’re building for. Because if you forget about the person who actually has to use your product, you can be sure that someone else won’t.
*This post originally appeared on the Intuit Network
About Stephen O’Grady:
Stephen O’Grady is an industry analyst and cofounder of RedMonk. He is based in Maine, a frequent traveler, ardent RedSox fan and focused on helping companies understand developers better and, in general, helping developers do what they do best. He is a paid contributor to the Intuit Network.
CeCe Morken, senior vice president and general manager of Intuit Financial Services recently presented the opening keynote at the Barlow Research National Client conference. This is part two of the video series, and discusses implications of technology for financial institutions.
In this video, CeCe identifies and describes 5 key trends:
1. Nimble Entrepreneurs
2. Participatory Services Networks
3. Reputation Rules
4. Mass Data Control
5. Remote Genius
Watch the video below for the full details: