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Thursday
Nov292012

The appification of consumer finance

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In the bad old days, when you bought a smartphone (aka a Blackberry) or a PDA (aka a Palm), you were basically stuck with the software provided by the manufacturer of the device. Of course, there were ways of installing new programs, but it was a hassle and there weren’t many developers. All this started to change in July 2008, when Apple launched the App Store, which made it easy for users to download and in many cases buy—and, equally important, for developers to list and in many cases sell—applications. Today, apps are the dominant paradigm not just on smartphones, but also on tablets and increasingly on the desktop, too.

It occurs to me that the explosion of importance of apps is a useful metaphor for where I think we are headed in retail financial services, which I wrote about in my last post. In the bad old days, customers were reliant on their bank to provide a basket of most of the financial services that they wanted to consume. Of course, some banks offered services provided by other parties to their own customers (mutual funds and insurance products spring to mind as examples), akin to Palm licensing bits of software from other companies for its Pilot. But customers could either take the options their bank had curated or leave them. 

But I believe we are starting to see the contours of the next phase in consumer finance in which customers mix and match products offered by different providers, allowing them to arrange a suite of services that together meet their financial wants and needs. This in turn will allow, or force, providers of financial services to specialize in products that meet sometimes very specific requirements. And switching from the metaphorical to the literal, the user interface for many of these services will in fact be apps: see for example SocietyOne, a slick mobile-first P2P lending platform. What’s interesting is that this evolution is happening at the same time in both developed countries and in developing ones—or at least, those like Kenya where payment services are taking off. The operating system on which all these apps will run is the payment system, allowing customers to move their money between products as they wish.

If you think this metaphor is sound, then you may not be quite as dogmatic as many are about the need for payment services to be fully interoperable. We currently have two major incompatible app platforms in the world, with a few other also-rans, and it is the very fact that these ecosystems are in competition with each other that spurs customer-benefitting innovation. As such, this metaphor implies something different with respect to interoperability than does thinking of payment services as “rails” on which financial products can be delivered. Fragmentation (incompatibility or duplication) in rail networks is so costly that they are typically regarded as natural monopolies. Whether payment systems are, in whole or in part, natural monopolies is a question the answer to which I’m not too clear on.

In any case, appification will transform the way that financial products are delivered and consumed. It will upend the financial services industry and make tough new demands on financial regulators. But it will be an unmitigated boon for consumers.

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