Consumer collaboration in financial services?

Consumer collaboration is a topic that is attracting a lot of attention for more than two decades already. Given that customer satisfaction from banking services is quite low (for the four biggest banks in Australia it’s below 70% according to Roy Morgan Research) it would be interesting to have a discussion about benefits of consumer collaboration in the space of consumer banking. Now, bear with me a little: I will start off with an example from a completely different industry…

One sector in which consumers actively collaborate with the producers is the entertainment industry. An interesting article by Reina Arakji and Karl Lang from the City University of New York analyzes the business case behind consumer collaboration in the video game space. The authors mention the classic example of Counter-Strike, a modification of an existing commercial title: Half-Life. Valve Software made 80% of Half-Life’s source code available to the public, therefore allowing its user base to modify it. Valve also encouraged and supported the community in its efforts to build such modifications, simultaneously creating a strong legal framework in which such ventures can create value. Counter-Strike is a “mod” of Half-Life, and in fact a completely different game all together. Its success lead to Valve buying the franchise in 1999 and financing the development of Counter Strike as a stand-alone title for many other platforms. This was probably the first commercially successful product that was born out of consumer collaboration in the digital space. The success of Counter-Strike (as well as other Half-Life mods like Day of Defeat, Team Fortress etc.) directly benefited the original product – these mods were the main contributors of the increase in revenue from the Half-Life title in the first three years of its sales.

It’s important to note that the video-game industry is well suited for such a collaboration to take place. As Arakji and Lang point out “the games [...] are digital information goods, which makes using IT-based toolkits to design new games quite natural. [...] (Secondly) most games can now be played online by multiple players, facilitating the formation of digital consumer networks. Finally, numerous consumers of video-games are technologically proficient and hence have the necessary ability to reinvent the way a game is played [...]“

So the question is: can the financial service industry benefit from such type of collaboration, and how? Looks like again I am tackling an issue bigger than a blog-post format allows, but let’s just play with this idea…

First of all, let’s note that today the provision of financial services relies mostly on connectivity and IT systems. The service is based mostly on information, in fact a very small part of what we do with banking requires a “physical emanation” (like payment cards, that can be replaced by a handset, after all). Hence, the first condition (being a digital information good) is satisfied. Secondly, most commercial banks deal with vast quantity of connected individuals. Multiple virtual banks have excelled in building online communities, so we can conclude that the second condition is met (existence of digital consumer network). Thirdly, we can safely assume that among these consumers there are people with enough skill and talent to take part in a collaborative effort.

So, there are good reasons to believe that financial services could potentially employ consumer collaboration. Perhaps the biggest challenge for commercial banking lies in the fact that it’s not a product but a service, and quite regulated one as well. In its current form it is not easily transmutable, or manipulated. Questions arise: can it be, and why should it be?

First of all: why? Frankly, I don’t really care about answering this question. My intuition tells me that yes, and I am too lazy to prove it by using any analytical tools at this stage. Perhaps someone can do it (or rebut it) in the comments. For now I will just base my assumption on the fact that there’s one important player on the market that is already doing it successfully…

… therefore also answering the second question: can it be done? Well, I invite all the bankers to have a look at what PayPal is doing with their X platform for developers. They are basically opening their existing API for people to code their own applications of payment solutions that PayPal so successfully has been offering in lieu of banking system’s inefficiencies. This time PayPal is taking advantage of more inefficiencies, and allowing the “crowds” to fill in the gaps.From solution for paying in pubs with your phone, buying quickly plane tickets, to stuff more complicated like B2B payment solutions (what a great market right from under banks’ noses). Pretty much building on the idea of iPhone application toolkit, or Google Android environment. So if PayPal can do it, I don’t see a reason why not a bank. Check out one of the youtube channels dedicated to this platform. And an earlier blogpost from online banking review on the subject here.

I see a potential scenario where an existing online bank with sturdy and well developed IT systems, creates open API to access a product factory. Firstly, mostly to help people build interfaces (like www.xero.com for SME segment, or www.mint.com for mass-market), and potentially down the line to create banking products. Banks can continue to focus on what often they do very well: risk management, and leave parts of development in the collaborative zone, while growing know-how in community and crowd-developer management.

I sketched a far-fetched scenario, I admit. Or did I? There are things that banks do already without so much fuss, just using the tools available right now. I have taken part in some client-bank collaborative efforts in design and implementation of classical products such as credit cards, overdrafts, co-branded products, online interfaces to name few. Using simple tools such as email distribution lists, bulletin boards etc. product developers can apply methods such as consumer-centric design to collaboratively work and engage with consumers. Security and confidentiality in such cases can be managed, but it’s not really the technical capacity that is the competitive advantage, but the ability to collaborate with the market  – and that becomes much harder to copy.

One example where consumer collaboration could help is mobile banking – space where banks haven’t yet been too successful. Have a look at mobank.co.uk – it’s not really a bank, in fact they don’t have a banking license, yet it offers interesting value in between the consumers and the banking system. I have seen the demo of this application before the release and know about its development enough to deduct that other apps like these can be pulled off by small and enthusiastic teams, thanks to availability of developer tools. Also, have a look at  Square – a solution for business owners to accept credit card payments through their iPhone. Wouldn’t it be interesting for a bank to have such applications designed within their zone of support and influence?