What could high street banks learn from start-ups?

28th May 2012

Mindful Money asks – Is it time banks took some lessons from innovative start-ups?

Businesses are battling a rapidly changing economic landscape, with big names falling by the wayside as they fail to adapt. High street banks might not be on that list, but some have needed massive bailouts and the level of distrust surrounding their services is at an all-time high.

So wouldn't it make banks' services more transparent if customers were charged a fee rather than being stung with high interest rates and penalty charges on credit cards, loans and mortgages? Mr Bailey suggested one benefit of current account fees would be that banks would be less inclined to rip off customers.

Certainly, something needs to shift as we enter a new economic era. As Naked Capitalism comments: "According to both the Mayan and Hindu calendars, 2012 (or something very close) marks the transition from an age of darkness, violence and greed to one of enlightenment, justice and peace.

"It's hard to see that change just yet in the events relayed in the major media, but a shift does seem to be happening behind the scenes; and this is particularly true in the once-boring world of banking."

What can banks learn from the likes of Spotify?

Start-ups that take off and grow are usually designed around a specific set of customers, whose needs and preferences are deeply understood. Most banks want to be all things to all people, so they end up being nothing much to far too many.

By their very nature, start-ups that survive and thrive stay close to their customers and make regular iterations of their offerings to better tailor it to what their customers want. While customers might not at first relish paying for what they might believe was ‘free banking' – they would enjoy a larger degree of transparency.

And there are numerous start-up models that banks might wish to take note of that are exploring exciting ideas and shaping the future economy. For example, while it might not be obvious to compare the likes of online music streaming service Spotify with high street banks, it has moved from a free service to one based on tiered charges, and reaped the benefits.

The Swedish company's is moving into Australia, says the Wall Street Journal, adding the world's sixth-largest music market to its 14-strong hit list at a time when Facebook's initial public offering has sparked a flurry of interest in next-generation web companies.

If banks could just sharpen their image, and provide a fair service based on a particular charging structure, perhaps this could shift them forwards – and see profits rise for their investors. As Alex McEvoy says in City AM: "Banks sell a very complicated set of products and clarity is vital so that customers understand what they are paying for."

Naked Capitalism comments: "…there is a strong movement at the local level for sustainable, "values-based" banking-conventional banks committed to responsible lending and service to the local community. These are George Bailey-style banks, which base their decisions first and foremost on the needs of people and the environment."

One of the leaders internationally is Triodos Bank, which has local offices in the Netherlands, Belgium, the United Kingdom, Spain, and Germany, which contributes to a range of socially responsible investments.

However, Bailey says the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying.

The future of banking

The best innovations are formed as a result of a fresh perspective – and whether this is a new charging structure or sustainable investing, different disciplines and industries can learn from each other to come up with the best ideas.

After all, it's clear that financial service companies have to work out how to appeal to the digital consumers, and the rapid growth of online competitors is increasing pressure to change.

This is demonstrated by banks introducing a range of smartphone and tablet app. For example, there was the launch of Barclays' Pingit cash transfer application in March – and more will follow suit.

The current system undoubtedly has cracks, and investors need to see a new, transparent, innovative, sustainable form of banking in place to profit in the future.


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