Banks cautiously open to partnering with tech innovators
As technology companies wade into the financial services business, banks have agreed that it is crucial to form partnerships with these news players, but not without some resistance.
Companies such as Apple and Google are brazenly encroaching on grounds that were traditionally held by banks, with products such as Apple Passbook and Google Wallet. The two applications facilitate payment of purchases through mobile devices.
The tech big boys' move into the payments arena may spur new players to jump on the bandwagon. There are already peer-to-peer payment providers, such as Bitcoin, that are popping up and are fast gaining momentum in the payments space.
Banks, which have traditionally kept to themselves, need to change traditional business models to make themselves more open to partnering with these new players, according to St George Bank CEO George Frazis.
But he said that banks cannot afford to completely open up to these new entrants to the market. There are many issues associated with partnering with external companies, including who actually owns the customer.
"You can have a perceived closed system [business model] with partnerships, and in this environment, you do need partnerships," Frazis said at the FST Media Annual Banking Technology and Innovation conference in Sydney. "Developing partnerships to help innovate is important, but you really have to do the thinking yourself."
He used Apple iTunes as a good example of an effective closed off business model where Apple uses encryption and an ecosystem of devices to ensure that the whole process of purchasing digital music is controlled by the company itself. This has made Apple one of the most profitable players in an industry that is seeing a huge decline in revenue.
"Financial services, to a certain extent, is in a fortunate position in that increased regulation is somewhat closing the system, so it's hard to be totally open," Frazis said. "But we have to continue to innovate, while still being open to the fact new players, like Apple, Google, and so on, are looking at [payments] in a totally different way, are not constraint by our way of thinking, and may come up with good solutions — so [banks] really have to be at the forefront."
In Frazis view, banks should maintain a closed system while keeping these tech partners at an arm's length.
Citibank Head of Operations and Technology Deepak Jain has a slightly different view.
"The danger is that we don't partner because we're obsessed by 'we want to own the customer; it's our customer, not their customer' and we need to be open to different models on that interaction," he said at the conference.
Technology innovators are unlikely to want to be in full control of the entire payment process anyway, according to Jain.
"Of course, those players are interested in terms of what they can do in the financial services space, but they also recognise the value that banks bring from a trust perspective, particularly in a highly-regulated industry," he said. "All those players will look to us to partner and lend them credibility in that space — I don't think they necessarily want to do everything a bank does, end-to-end."
"The first time a terrorist organisation moves money through iTunes, the regulators will be all over Apple, and the company probably doesn't want to get into the space of doing Know Your Customer on everybody that opens an iTunes account."
Partnership is mutually beneficial for banks and technology companies that want to enter the financial services sector, according to NAB Executive General Manager for Direct Banking Sam Plowman.
"These global businesses have a lot more capital to invest in research and development than we do, and spend a lot of time at the customer interface point," he said. "Where possible, we will partner with these guys and venture into new markets with them to ensure we stay relevant, which is important for the industry."
Commonwealth Bank has already partnered with Facebook to facilitate payments on the social media website.