Prepping for Prime Time
For technology, the world of banking can be likened to a major movie production in which scores of actors clamor for only a few coveted spots. There are, however, scattered among the extras, a few stars waiting for someone with a careful eye to recognize their potential.
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In the technology-heavy productions orchestrated by banks, these potential stars are overlooked change agents, often described as disruptive technologies. They are defined as new products, services or business models that initially target small, often unprofitable customer segments, but eventually evolve to take over the marketplace, according to Clayton Christiansen, founder of Boston-based consultancy Innosight.
For bankers, change is never easy. "Banks tend to be interested in new technologies early, but they tend to embrace new technologies too late," says Steve Wunker, a partner with Innosight. Yet banks should be commended for ushering in the future, he adds. "Historically, there have been a lot of disruptive technologies in banking -- from payment systems to ATMs to the Web," continues Wunker. "But in the present day, we haven't seen major new disruptive technologies pushed—more like disruptive business models."
So what will be some of these transformative technologies in 2006 and beyond? Experts in a variety of areas gave BS&T their take on what may be some of the most pivotal disruptions to the banking industry.
Payments
RFID-Enabled Cards
Swipeless/contactless payment cards operating with radio frequency identification (RFID) technology received much attention in 2005. The idea behind these cards is to wean consumers off cash for low-value transactions while giving them a convenient means to pay merchants. But will such a cash alternative take a bite out of banks' ATM networks?
"Contactless is about cash displacement and throughput," says Jim van Dyke, founder and principal analyst at Pleasanton, Calif.-based Javelin Strategy & Research. "Will [these cards] displace ATMs? Maybe you'll see some erosion, but [rather] the ATM model has to change."
"If you think of ATMs as cash dispensers," maybe contactless poses a threat, adds Nina Owens, global solutions leader, payments strategy, with MasterCard (Purchase, N.Y.). "But that's not the best way to look at ATMs—you should see them as a way to provide value-added services." Swipeless, Owens says, could in fact enhance the ATM, offering further convenience to consumers.
Paul Race, director of innovative marketing with Dayton, Ohio-based NCR, sees opportunity in contactless. "[Contactless] is one of these disruptive technologies that will change consumer behavior," he says. For example, "For ATMs, it can offer more simplistic technology" for accessing money, Race offers. Or banks can go a step further and eliminate cards, replacing their functionality with RFID-enabled mobile phones, he suggests.
Payroll Cards
Payroll cards—plastic substitutes for costly paychecks—have existed for a while, though banks have not exactly embraced them, according to Cynthia von Hollen, banking industry principal, SAP (West Chester, Pa.). In spite of any perceived danger of disintermediation, in which users find they no longer need to maintain bank relationships, insiders say payroll cards actually can provide banks with a terrific opportunity for growth.
Large banks have been in the payroll card space for years, explains Katy Jacob, senior analyst with Chicago-based Center for Financial Services Innovation. They know it is a good value-add for commercial customers, she asserts.
"[Banks'] corporate customers will eventually force banks to offer payroll card services," SAP's von Hollen says. "Any way banks can offer new products to their corporate customers is going to solidify those relationships, expanding the financial supply chain a bit further."
But a good payroll card program also looks beyond the employer, says the Center for Financial Services Innovation's Jacob. Since some employees do not maintain bank accounts, payroll cards open the door for banks that want to reach this unbanked market. "None of these cards can exist without financial institutions," Jacob relates. "Prepaid cards change the way banks look at customers. It's a way to get into new spaces and sell customers higher-margin products in the future."
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