At the center of your net worth is a virtual pile of money. But our piles of money have become elusive. They are no longer residing in cash in a physical bank and people are making more irresponsible financial decisions than ever – leading to unprecedented consumer debt, with 20 consecutive quarters of increases, and counting. Let’s look backward and forward to examine how banks have transitioned from simple vaults in the past, to currency exchanges and transaction processors today, to becoming the real-time virtual personal financial advisors and clearing houses tomorrow.
Queue the rewind sound. Money gives us a standard medium of exchange. In the old days, you’d withdraw your money from your local bank to exchange with sellers for goods and services.
But sometimes buyers didn’t have money, so they’d offer an IOU (I owe you). An IOU is a direct acknowledgement (written or verbal) of a debt, but it’s neither a promise to pay nor a guarantee of one’s ability to pay. Because of this, the IOU has low liquidity and low transferability. IOUs are usually only honored with buyers and sellers who have a direct relationship.
But we wanted more. We wanted the ability to get things from sellers with whom we had no relationship and without physically paying money. So, we invented cheques, which were linked to our bank accounts. A signed and delivered cheque validates that the buyer approves his bank to transfer funds (if they exist) from his account to the seller’s. If such funds exist, the buyer’s and seller’s banks then transfer those funds – adjusting each account balance accordingly. But cheques need to be processed physically, and that takes days. What if we don’t want to wait that long? Gasp! And some sellers may not trust cheques from small local banks with which they’ve never done business.
To speed things up and ensure our ability to pay, we invented credit cards that let us provide an immediate overlay of assurance to the sellers. Credit cards (well, most of them) are backed by widely known creditors that are regulated by the federal government. With credit cards, sellers are made more confident by dealing directly with a financial entity that they can trust. And with the invention of good ole’ interwebs and card scanners, credit/debit card transactions are now electronically completed in seconds, which solves the problems of speed and guaranteed payment.
But there are still some gaps. What about situations where we want to buy things immediately, but we have no cash on hand and the seller is not set up to accept credit card transactions. This is where online services such as PayPal and Venmo come into play. They are like virtual bank accounts and are linked to one’s bank account, credit card or debit card. In these situations, the buyer only needs the seller’s email address or contact information to instantaneously guarantee payment.
No money. No bank, No cheques. No cards. No wallet. No Problem!?
Big problem! You can send money to anyone, anytime, for anything, but if the virtual pile of money runs out, you’re in trouble. Because our virtual piles of money are tough to quantify (spread across multiple banks, accounts, cards, assets, etc.), we don’t always make the smartest buying decisions because we can’t determine the relative value and affordability of all the things we might want to buy.
So how can banks use their wealth of customer data to help customers make sure that the pile doesn’t run out, or even grows? In 2020, retail banks are moving past helping customers store money and manage individual transactions. They are now building partnerships, integrations and using analytics to help customers manage their financial lives – spanning daily purchases and sales, major assets, debt, savings and long-term investments.
Wait for it… imagine a world… where your bank embraces open banking to enable 3rd party entities to integrate their financial capabilities with customers’ accounts. Imagine how blockchain can speed the validation of transactions. Imagine how AI-driven customer analytics can look across all accounts, with a contextual understanding of one’s profile, behaviors, preferences, goals and situation to help guide day-to-day purchasing decisions. Imagine an app that knows what’s in stock in the store you’re in and recommends which products you should buy based their short and long-term value to you. You can ask your app if you can afford that BMW (you can’t). It can make recommendations for alternative vehicles based on your preferences and financial goals. The app can help you make investment decisions for retirement and process the transactions across any financial institution. The app knows your spending habits across all vendors and can tell you when an exceptional deal becomes available on an item that you would highly value. The app can provide pre-filled optimized shopping carts for the items you want and need based on your financial trajectory. Deviations from the recommended shopping carts will inform machine-learning based updates to future recommendations. The app can help sellers optimize pricing for goods and services that they sell. It can guide and manage all your financial decisions and transactions while abstracting you from any sense of a money exchange. This app can bring back visibility to the elusive virtual pile of money, that has been shielded by so many layers of disparate financial entities and services.
While combining all of these features into one app may still be a few years out, each of these capabilities already well within our technical capabilities to produce and I believe that 2020 is the turning point where banking customers will shift from shopping on interest rates and transaction fees, to shopping on how well the bank can improve day-to-day purchasing habits based on a contextual understanding of their short and long term goals, preferences, and situation.