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New Banks and Old Models

August 8, 2012
Debit|Banking_Channels
Patricia Hewitt
Mercator Advisory Group
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Watching new banking strategies unfold, such as the recent roll out of Simple, I'm struck by the idea that while these developers may be re-envisioning the banking experience for a digital audience, they don’t seem to be doing much to re-invent the business model that supports retail financial institutions. As a result, are these new products truly moving the industry into the future or simply creating a new competitor in an old arena?

Recently, I examined a number of these new bank offers in a report we published in June, Banking 2.0: Innovation, Disruption, and the Better Idea, in which I pointed out that most of these banks are front ends to existing banks and further, that the debit card used to access money on deposit is a prepaid card. Finally, one of the primary banking partners for this kind of offer is one that falls below the Regulation II threshold, thus debit card interchange fees aren't regulated. As I pointed out in this analysis, this is not meant to disparage these companies, since they are recreating the user experience and piloting new ways to think about the consumption and delivery of financial services and for that, they should be taken seriously.

Rather, these new products don't address the fundamental problem that retail banks face, which is a dismantling of the historical business model, one based on interchange and exception fees; since these new banks depend on existing interchange fee revenue streams to fund their offers. I have to question then if this is really moving the industry forward towards a new business model or just putting on a fresh coat of paint? As the market absorbs new feature functionality, creates new digital means of accessing funds on deposit, and offers higher level of convenience and relevancy to consumers - isn't that worth something to the end user? I suggest that this is the perfect opportunity to break through the concept of free services towards a model that is more balanced across stakeholders.

That means that consumers should pay their fair share of the cost of services and what better time to connect fee to value than when an industry is expanding services. I would challenge these forward-thinking developers to consider how best to move the industry into the next generation of services through the establishment of a sustainable business model based on a balanced base of revenue streams and designed to once again highlight the advantages a highly sophisticated financial services industry offers to all its stakeholders.

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