Banking Technology Social Media Capco


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Banking Technology Social Media Capco

  1. 1. TECHNICAL BRIEFING February 2009 The end of the road for retail banks? A wide variety of banks are turning to social media and peer-to-peer financial models says Harriet Beare-Greenwell, Capco looking to participate in such media and many audit the ocial media, also known as Web 2.0, and defined as S conversations taking place on social media platforms to the use of web technology to enhance creativity, understand brand impacts and identify potential information sharing and collaboration, have created improvements to products and services. new ways for companies to interact with, learn from and A wide variety of institutions, from ING to Wizard bank, distribute to customers. Social media have also become a are turning to social media. By doing so, they hope to powerful channel through which customers can influence engage customers through differentiated propositions and brand reputations. Until recently, financial services enhanced banking experiences. Interestingly, however, UK companies believed they were exempt from the social media institutions are lagging behind, and only a handful of retail phenomenon; however, developments such as the creation banks (First Direct and Smile amongst them) are pioneering of online peer-to-peer (P2P) financial services models have this field. prompted traditional financial institutions to explore social media as a means of differentiating their proposition. Indeed, The P2P Challenge with 48% of online users saying they would consider Although an increasing number of institutions are using changing banks for comprehensive Web 2.0 tools, it is easy social media to seek differentiation, the most advanced form to see why institutions are now eager to engage with this new of social media within financial services has been developed medium. by new entrants, those hosting P2P platforms. P2P models A number of financial institutions have developed involve the decentralised production and distribution of initiatives that harness the strengths and capabilities of social goods and services over the Internet. Whereas most media. Broadly, these can be split into four categories: ➜ Content Sharing: these initiatives revolve around the interchange models involve a direct relationship between a company and a consumer, P2P enables direct consumer-to- production of content by individuals for distribution online, consumer interactions. At its core, the financial P2P platform and include tools such as blogs. The Royal Bank of Canada is a high tech return to early forms of banking, where there was amongst the first banks to use this as a customer was a direct link between lenders, borrowers and the wider engagement strategy, launching a site to address the community. With escalating numbers of people meeting their financial concerns of students. The site hosts the RBC financial needs through P2P models, these are increasingly bloggers board, which answers questions and aims to a force to be reckoned with. position RBC as a trusted advisor to younger customers and to secure their lifetime banking needs. ➜ Online communities: with 56% of European online Who are the players and how does it work? P2P’s biggest success to-date is in consumer lending, where users belonging to an online community, these sites, Zopa and Prosper are two leading providers. The platforms designed to attract particular interest groups, have proved have adopted eBay style operating models (matching buyers hugely successful. American Express capitalised on this and sellers at the best mutually agreed prices), except that when it launched its OPEN portal, designed for small what is brokered are loans rather than consumer goods. business owners. The portal enables small business owners Borrowers set the maximum rate they are willing to pay, to compare strategies, access software packages and takes whilst lenders set the minimum interest rate they are willing the community into the ‘physical’ world by hosting to earn and bid on loans. Once the auction ends, bids with networking events. Through its product development page, the lowest rates are combined into one loan. The company users have provided feedback to enable the development of handles the loan administration, including repayments, a bespoke credit card for small business owners (the Plum delinquency and pre-approval work such as credit scoring. Card). ➜ Social Media Marketing: this has proven a popular Moreover, P2P financial models are expanding beyond loans and an increasing number of platforms allow area for banks to explore. BBVA, for example, launched a individuals to invest directly in an array of enterprises. Sites FaceBook-only offering for a new account, while more include: complex offerings include Wells Fargo’s Stagecoach Island, ➜ Bandstock: allows listeners to become investors in an online game where players earn virtual money by their favourite bands; answering financial questions (the game is an extension of ➜ Kiva: runs a philanthropic investment scheme enabling Wells’ financial education campaign, aimed at securing the customers to directly fund the enterprises of developing banking needs of financially astute customers). ➜ Mediation: best seen in comparison sites and financial world borrowers; and ➜ eBay: set to launch MicroPlace, an online marketplace intermediaries (such as, these are where individuals can make microfinance investments. platforms created to distribute information on products and From mortgages through to savings and investments, brands. A recent Nielsen study found that consumer there is considerable excitement around prospective P2P recommendations are the most trusted form of advertising, models. One US company is starting a P2P quasi-venture meaning that institutions need to engage with these capital model where lenders have a voice in the running of ‘involuntary media’. A number of institutions are currently ❘ 44
  2. 2. In light of this, traditional institutions have two choices. the start-up companies in which they invest. The first P2P Some, like VirginMoney, may opt for wholehearted insurer is also rumoured to be launching shortly. immersion in the world of social media and P2P adoption. The Threat to Traditional Banking Alternatively, they may employ social media tools on a more selective basis. This approach allows the bank to offer the P2P players, although still minnows compared to the titans of best of both worlds: the benefits of a physical bank the financial industry, are increasing their market share combined with the attractions of social media. What is rapidly. Some studies suggest that by 2010, P2P lending may certain is that traditional banking needs reinvention. This is account for 10% of the retail loan market. Underpinning this made evident by the current financial crisis, which is growth are several factors. Firstly, rising numbers of shedding light on personal financial management and the borrowers are finding that with traditional lending avenues role of institutions in helping customers better manage their drying up, P2P platforms can provide attractive alternative money. Social media may go a long way in helping financial funding sources. This is especially true as interest rates institutions achieve this. (especially for those with sub-optimal credit ratings) tend to Financial institutions wanting to harness social media be favourable. More interesting is the attraction for lenders. will still be stepping into relatively unchartered territories. Although prospective returns appear attractive (with average Although an increasing number of players are developing returns of 6.5% advertised), the actual rate of return may be social media strategies, there is still no “golden manual” to significantly lower. The risk of delinquency is also relatively achieving a successful approach. Nevertheless, a structured high (for the highest rated loans on Prosper about 1 of every approach can ensure that opportunities are captured: 666 defaulted and delinquency amongst sub-optimal borrowers is substantially higher) and most lenders have ➜ Step 1: Undertake either a Social Media Audit or limited risk diversification. Moreover, as monthly repayments traditional customer research (e.g. a customer forum) to by borrowers cannot be reinvested until they add up to delineate what customers want from a financial services another loan of at least $50, lenders may suffer an player offering social media; opportunity cost. Thus, the popularity of these models for ➜ Step 2: Based on the research undertaken, business lenders must be attributed to factors other than pure financial and operational principles should be defined. These will gain, for example, a desire for a community approach to set the strategic tone for the social media journey and will finance or a wish to cut out traditional financial institutions. delineate the high level business aims and operational timeframes; ➜ Step 3: Determine the future state social media (Web 2.0) levers and the customer services model that those levers map to. Essentially this will involve baselining the requirements for the social media strategy – how will the Rising numbers of borrowers are strategy meet the business principles defined? How will the finding that with traditional lending introduction of a social media strategy change the customer service model? avenues drying up, P2P platforms ➜ Step 4: Define and develop the social media tools and can provide attractive alternative functionality that will map to the future state model. Through this, high level principles will start to materialise funding sources. into plans for detailed tools, translating business requirements into actual functionality blueprints; ➜ Step 5: Assess the gaps between current state and the future state functionality. This will be used to develop the roadmap of steps required to deliver the future state; ➜ Step 6: Develop the roadmap that will establish the levers and tools required to deliver on the vision, laying out A new type of bank? how the project will be undertaken and the corresponding timelines. Although P2P models appear to embody a return to Overall, social media responses must be tailored, traditional, community-based banking, mass financing targeted and long-term. Initial small steps (e.g. a blog or a cannot be run without intermediaries. Zopa and Prosper forum) should be the first move towards the development of provide administration, credit rating and debt collection links. any long-term strategy. Prosper is regulated by the SEC (as it sells packaged loans An old Chinese proverb says, “when the wind rises, to secondary markets), while Zopa will eventually face similar some people build walls, others build windmills.” Banks are FSA regulation. Fundamentally, these institutions are a new well advised to start investing in windmills, leveraging social form of banks: these enterprises are not, as might appear at media to differentiate their proposition and enhance the first glance, the heralds of global disintermediated finance, customer transactional experience. The risk still exists that but new and savvy financial institutions. Cleverly, these new in time P2P financial models will revolutionise the financial entities have effectively outsourced the relationship landscape by introducing an era of ‘disintermediated’ mass management element of banking to their own customers, by micro finance. And, if that happens, those traditional banks basing their ethos on community lending. In so doing, they which resisted change may find little solace in the walls have brought back what customers are increasingly looking they built. for and what was lost through the impetus of banks to reduce costs via a mass market impersonal model: influence, Harriet Beare-Greenwell is a consultant at Capco sociability and interaction. ❘ 45