Facebook brings the game to legacy banks

The recent news that Facebook is close to gaining a banking license in Europe is an interesting development, and potentially quite a frightening one for the established banks. No longer will banks be able to complain that e-money technology vendors are cutting costs by way of their freedom from proper regulatory scrutiny. Now, Facebook will be play by the banks’ own rules.

However, this does not mean that it will use the same game plan.

Most banks now use social media for marketing and brand awareness. Some banks have gone even further, and Fidor bank’s use of Facebook (setting interest rates according to the number of likes the firm receives, and so on) is not as well known as it should be. However, such innovation remains extremely unusual, and no mainstream bank can match the kind of native social know-how, and expertise in building emotional connections that is second nature to Facebook. Facebook already runs a highly customer-centric business and knows how to focus on its customers’ immediate wants. This should allow it to build market share and awareness much more effectively than legacy banks.

It has taken the legacy banks too long to wake up to the transformative effect social media is having on the way in which consumers interact - not just with each other, but with organisations as well. Consumers now expect the companies they patronise to be part of the same always-on social ecosystem they themselves inhabit. And, while banks ease themselves into the 21st century, the social media game itself is already moving on.

Unencumbered by a legacy infrastructure of branches and aging IT, Facebook could potentially generate a great deal more profit from transaction and payments services than established retail banks.  Indeed, Facebook’s reserves of cash and secure revenue streams mean that it could potentially absorb a loss on services while it establishes itself in the market.

While many commentators have pointed out the potential for Facebook to exploit the remittance market and offer services to unbanked migrant workers in Europe, it must surely have its long term sights trained on established banks. It’s conceivable that Facebook could expand the services it offers to eliminate third-party payment services, and become a one-stop day-to-day financial service for the digital consumers of ten years’ time. In theory, Facebook could allow customers to conduct the majority of their transactions online and through NFC-enabled mobile wallets (perhaps secured by biometric technology), allowing instant, secure purchasing, with as few interactions as possible.  

Facebook also has access to much more sophisticated customer analytics than any normal bank – they even know what their customers like and what they might be willing to pay for. While there are some security implications, data gives Facebook a huge advantage over the established banks. In fact, the company has the potential to become the largest bank in the world, if it can persuade users it can be trusted with the security of their financial data.

Becoming a licensed bank means that Facebook will have to assume the responsibilities of a bank, and guarantee its customers’ money. This should go a long way to building trust and, with its insights into social data and marketing, the company ought to be able to consolidate that position relatively quickly.

Until the established banks become more data-driven – and until they use data to become more customer-centric – then there will always be an opportunity for innovative newcomers to the market. These are not limited to the 'challenger' banks which have emerged over the last decade or so, but now include other service-based companies as well. Its customer-centric ethos makes Facebook well placed to take advantage, and legacy banks should not ignore its moves in their industry.