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Tuesday, 23 March 2010

Could a billion people break the existing banking model?

In February Thomas Power the founder of eCademy wrote a blog entitled ‘What happens when Facebook becomes a bank?’. It sparked a huge debate around the role of social media in banking something that was firmly on the agenda at SXSWi last week with Smartypig, CreditKarma, Mint and Lending Club sitting on the panel. We hope to report back on the outcomes from that panel next week, however while SXSWi was running Power followed his blog up with a clarification of his position on video.

His argument runs that when subscription levels to Facebook hit a billion - as predicted by the end of 2012 - that it will hit a scale and organisational maturity that will not only facilitate the sales of simple products such as loans, insurance and savings, but will mean groups of individuals will be in a position to come together to execute group purchases and lending on a huge scale. It would be a simple task for Facebook to integrate a facility such as Zopa onto it’s platform and then users have access to all the tools they need.

If we work on the basis that Facebook's 2008 poll has some validity then 13% of users would be happy to use the platform as a bank. If we then assume an average £1,000 deposit with the bank of Facebook then at a billion users that's a £130 billion business, something financial institutions would have to sit up and take notice of.

Mark Zuckerberg is an ambitious man. Scale is his goal. The product will develop itself and as Power says the person with the biggest number of names wins the game. Financial institutions need to take note.

Crispin Heath
Head of Digital

Tuesday, 9 March 2010

Do Stella Artois know the true price of FREE banking?

That nice man with the golden grey locks and the snazzy jumpers has gone and burst the free bubble. He’s talking about, people actually having to pay for financial services they use! In a recent release Virgin Money has come out quite deliberately on the side of demanding cash for the privilege of facilitating our balances.

Now I‘ve read quite a few of the economics manuals and they all state that the greater the competition the lower the price as everyone dives headlong towards owning market-share. Well FREE in my book seems to be a low price, however just to prove a point Halifax want to actually pay me £5 per month for my balance.

So how and why then should we consider paying for a Virgin Money Current Account? Will it be so different that it warrants me paying for it? Well only time will tell, but for my part, modern banking is little more than online facilitation nowadays. Yes when it comes to loans or savings I pay or get rewarded for my business, but Banks don’t really service me. I, like millions of others, choose to bank online and in that environment I’m a self service customer, so just why would I pay?

Added to that, there are a number of new and innovative money managers coming to market all available via the web, Mint or Wesabe from the states are some good examples. They actually help me manage and make the most of my money, which my bank doesn’t and again they’re FREE.

Now the debate about FREE banking has raged in recent years. Ever since the introduction of packaged accounts and the OFT’s pronouncements on credit card charges. All of which reached a recent crescendo with the subsequent failure on the fairness of banking fees.

So how and where does Virgin’s pronouncement fit? Well I think it makes the issue more confusing. Why can’t we just get the truth behind what it costs to run a current account? Naive I may be, but this has to be the holy-grail of modern banking. Once we have that, we the customer can decide whether we value plain vanilla or the bells and whistles of packaged accounts.

So is Mr Branson the White Knight of Banking and are the Virgin fees being brought about by actual competition or the desire for transparency? I’m not so sure it’s either. While I may desire the holy-grail, the reality of linking what a customer pays for a current account and what a bank charges is almost impossible to calculate. It depends on way too many variables; the type of financial institution; how many overheads the business carries; the cost of security; technology and the amount it pays its employees; the amount that shareholders or Venture Capitalists want as a return etc.

What worries me is it could be nothing more than a marketing trick to ensure margins. One just like Stella Artois used. They made us believe that paying a premium was worthwhile for the taste, when in fact all we got was good old fashioned Belgium cooking lager. ‘Reassuringly Expensive’ they called it!

Well for me all this increased competition is nice, but more choice doesn’t equate to better and paying for the privilege certainly doesn’t either.

David McCann
Planning Director