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Philip,

The issue is not that Starbucks keeps its deposits in a bank. The issue is that as utility of payments is freed up from the existing rails, that these new players act as a new payments layer on top, capturing deposits, and creating new payment use cases that the banks, card issuers and networks are not playing in - except for very limited cash-in/cash-out interactions.

Think of it this way. iTunes has 400 million accounts. By you way of thinking we should be celebrating that Apple has a bank account with a bank somewhere, but what about the fact that Apple has 400 customers transaction outside of the bank rails on iTunes? How long before they don't need the rails at all?

Banks won't disappear from the interactions, their role will just be minimized.

It's all about perspective. Let's take Starbucks.

You would argue a very niche provider of 'payments' as a closed loop system, with little impact to the overall bank payments market. If you are a major bank, you might have a point. However, with 35% of their in-store payments handled by mobile app in the last 12 months, Starbucks generated more than $2 Billion in deposits on their niche app (digital gift card).

To put that in perspective, Starbucks garnered more in deposits last year than 70% of the 7,500 financial institutions in the US, all of whom hold $1 Billion in deposits or less.

Sure, Starbucks isn't going to replace ACH just yet, but that's hardly the point. They're far more effective at deposit taking than 70% of the US banks, and have very efficiently created an entirely new payment mechanism that circumvents interchange. Arguing that "They are in a totally different league and game" from ACH or Visa/Mastercard is missing the point. 

It works because the current system isn't as effective. Increasingly we're find a ton of use cases where this is evident and P2P is the most glaring. When taken in isolation, new payment modalities like Starbucks could be argued as being small, but when you take all these new plays on the whole - they are eating away at the core of the business and you'll be left with a heavily fragmented payments architecture, built outside the traditional rails. 

Great for consumers, not much good for the industry who loses access and revenue over time.

Alexander,

I think you misunderstood. I can see that clearly from your follow up blog.

The issue is - are the current rails robust enough to cater for every payment instance or use case, and to do so with maxiumum efficiency to the end consumer? No, not even close.

The issue is not about replacing the existing rails, or a justification of whether PayPal (for example) is better than SWIFT. Nor is it an argument about the costs of doing so, the issue is that the new payment modalities that are coming into creation today demonstrate a fundamentally different approach to the simple issue of getting a payment from one party to another digitally. They won't replace the existing system, but neither can the existing system satisfy all of the modalities we now require - the primary mechanisms being simplicity, context and real-time responsiveness.

In this instance, it could indeed be said that the current system is like the Emperor with no clothes - no one wants to admit that the current system isn't adaptive to change and robust enough to fit all these new modalities, but the reality is there is too much activity going on in the payments space already borne out of pure and simple demand.

It's quite simple. If the existing system was good enough (as you suggest) - then PayPal, Square, Dwolla and GMail P2P would not exist today. This is not solving a problem that doesn't exist, you've got that wrong.

Get ready for a lot more complexity and payments variety. The incumbents are no longer the sole players in this game Alex! The incumbents had their chance to do things differently when the web first appeared, and then when smartphones came along and they missed the opportunity.

BK 

Alexander,

I think you misunderstood. I can see that clearly from your follow up blog.

The issue is - are the current rails robust enough to cater for every payment instance, and to do so with maxiumum efficiency to the end consumer? No, not even close.

The issue is not about replacing the existing rails, and the costs of doing so, the issue is that the new payment modalities that are coming into creation require a fundamentally different approach. They won't replace the existing system, but neither can the existing system satisfy all of the modalities we now require - the primary mechanisms being simplicity, context and real-time responsiveness.

In this instance, it could indeed be said that the current system is like the Emperor with no clothes - no one wants to admit that the current system isn't adaptive to change and robust enough to fit all these new modalities, but the reality is there is too much activity going on in the payments space already borne out of pure and simple demand.

It's quite simple. If the existing system was good enough - PayPal, Square, Dwolla and GMail P2P would not exist today.

Get ready for a lot more complexity and payments variety. The incumbents are no longer the sole players in this game Alex!

BK 

Eric,

I appreciate what you are saying and this is an industry problem to address, however, we had the same concerns and issues when Internet Banking and Internet Payments and Settlements started. Granted there were a few teething problems, but in the end consumers opt for efficiency, ease of use and seamless customer experience over unwieldy, staid (but secure) processes.

In the end, once ease of use comes to the fore, baring a total meltdown on bank security - the concerns you've raised won't effect adoption one iota.

This is a hygiene factor only.

Brett King
BANK 3.0 

Technology can, and should, be part of the solution for personal care of customers. The two are not mutually exclusive.

Salil,

I think you've taken the wrong 'take aways' from Ron's post. The reason I think PFM hasn't worked is not that people don't need better control or alternatives to day-to-day banking utility, but that current PFM tools are a poor trade-off in terms of outcome. That is, you need to invest considerable time on a systematic basis to get a positive outcome. We know that only 10-15% of the banked population can be bothered to invest time in PFM for that very reason, the trade-off is poor unless you're an accountant/control-freak when it comes to budgeting.

We live in the instant gratification age - so PFM doesn't produce this type of instant turn-around benefit. Unless, you can make it contextual - see Movenbank CRED.

The key to understanding why there will be a shift in the distribution layer is that the current system is full of inefficiencies and friction at the customer front-end. That provides no value, but makes it difficult to switch, etc. As soon as someone breaks the back of that - it is just 'friction' and no longer value.

BK

Salil,

I don't think the barriers to entry are there in the way you think they are. Your thinking reflects a traditional view of the market. 

Think about the fastest growing consumer deposit product in the US and China right now - prepaid Debit cards. These are growing for exactly the opposite reasons you articulate. The simplicity of the product, the ability to circumvent the traditional KYC and cash-in/cash-out restrictions, and the advocacy platform. 

The old rules simply are breaking down. The reason financial services is set for such a shake up is there are too many people that think that the inertia in the system is enough to keep the old paradigms going.

BK

Traditionally we'd emphasize the value of physical stores as the ability to touch and feel a product, or in the case of banking to get advice. The new differentiation is 'see and feel' a connection with brand - this is why Square is focusing on building customer experience above anything else, and why they've been so successful to-date.

Compare that with banks who have zero creative capability in-house in most cases, and rarely test user experience until the product has been designed, paper application form/branch process and all. 

This is going to be the new differentiator for FIs - service experience evidenced through great journeys and creative. Not through process, location or product.

Finextra Member:

You don't think 2 million merchants in 2 years (Square) or 110 million account holders/members in 12 years (PayPal) is evidence of building network?

BK