The Long Tail of Banking

Aneace Haddad has asked me to explain more about my idea of a Long Tail in Banking.

 

The Long Tail in banking would be a mass market of niche microgroups that incur no cost overheads to manage but, for each transaction, creates a small profit. As the mass of niche transactions build, the small profits become big profits. This is not far off what banking does anyway – processes massive volumes of small transactions – but, right now, we focus upon making money out of account management.

Account management involves staff to deal with the customer onboarding process, KYC and AML requirements, service on the telephone and in branch, as well as transaction processing and account maintenance.

However, in the case of the long tail of banking, there are no accounts. You want to reach people who were previously underserved, because it would not be profitable. Using technologies such as the internet means that, today, you can serve them. You can serve them because there are no people involved, no account onboarding process, no branches or telephone support services, and no account maintenance costs.

So, are we talking about the unbanked?

Yes, but a whole lot more.

We are talking about children, students, the unbanked, the underbanked, the grey market, the welfare market, the pensioners, the migrant workers and more. And we are talking about social lending and saving, PayPal, prepaid and mobile.

Social lending sites, such as Zopa and Prosper, are connecting the long tail of savers and borrowers.  This is best demonstrated by Kiva, where anyone can invest a few dollars in microfinancing people globally.  A global connection of niche players.  I've blogged about these sites before, but they show one aspect of internet financing that is based around a long tail model.

PayPal is an even better example of showing a great way to create profits out of the Long Tail, although its reach goes far beyond the long tail.

As mentioned yesterday, PayPal provides a method of moving money between people globally in multicurrency at low cost. PayPal claim to reach out to over 160 million registered users, with one in three requested at least one payments transaction every quarter. PayPal make their profits and revenues by charging a $0.30 flat fee per transaction as well as a variable percentage of 4.9%, reducing to 1.9% or 2.9% for Premier and Business Accounts respectively. There are also fees for cross-border transactions.

The real secret of PayPal’s operation is that:

(a) it builds on the existing bank network, as you have to have a bank account to use PayPal; and

(b) an email saying “you’ve got money” makes people open accounts.

The overall result is that PayPal’s model has increased reach and breadth immensely by linking people to money using viral networking. They do reach the long tail through this structure but, in terms of the long tail, they also have a major restriction. You have to have a bank account and proof of identity to move monies around with PayPal.

So there’s a barrier for some of the children, students, unbanked, underbanked, grey market, welfare market, pensioners and migrant workers.

So we need to look at prepaid and mobile for these folks.

Prepaid provides a great way to reach the unbanked and underbanked, as mentioned last week.

In one of the best examples of a prepaid programme, migrant workers in the United Arab Emirates, working on their massive construction projects, are receiving their weekly and monthly wages on prepaid cards.

They can get cash and pay for stuff around Dubai without a bank account, and the beauty of this card programme is that it comes preloaded with one cross-border money transfer per payment period for free.

Migrant workers can receive their monies and send money home painlessly.

Prepaid for kids as gift cards, or for students as a budgeting method due to weekly restrictions on balance limits of usage, or for government welfare and company benefits is seen as one of the strongest markets for reaching the long tail of finance.

However, there is still a restriction here.

To get cash, you have a habitual movement of people that creates a criminal focus.

I only discovered this one recently, and it was the idea of moving monies around on cards that highlighted an issue.

The issue is that in countries where the criminal fraternity are represented typically by gentlemen with large muscles or big guns, receiving money on a card is a problem. The problem is that you have to go somewhere to get the card, and then convert the card into cash.

Apparently, for example, many people would know that they were getting a prepaid card on a Friday morning from their offspring overseas. So they would toddle down to the Post Office on a Friday morning, pick up their post with their prepaid card, and then go straight to the cash machine and convert the card into cash. As they walk out of their Post Office with their lovely lolly, the men with big muscles and large guns jump out from behind the nearest lamppost and nick the dosh off them.

Whoops. I apologise as I’m getting a little colloquial here.

The point, I am told, is that card payments create physical movements that can be tracked and targeted by criminals.

And so we come to mobile. 

Mobile overcomes the issue because you do not have to go and physically get a card and then translate that card into money.  You can receive a mobile payment anytime, day or night, and then use the money flexibly either on your mobile account or as cash, but not by always going to the same place at the same time, every week or month.

Mobile overcomes these issues because:

• almost everyone has one, or can get access to one,
• you do not need to have a bank account to have a mobile,
• mobile technology is cheap to access and easy to use,
• mobile builds upon internet technologies to become even cheaper to access through VOIP
• you can move monies wirelessly, silently and easily between people
• the money movements do not create physical movements that are necessarily habitual and tracked by criminals
  
• mobile is global 

... one could go on and on.

Whether you prefer mobile or prepaid as your focus, they combine to create the real long-tail of banking. Mobile and prepaid can reach one and all, with micropayments that do not add overhead to the bank infrastructure, but can build volume for small transaction fees on each transaction.

Suddenly, the billions of unbanked and underbanked, the long tail of society, can be served through the financial system at virtually zero cost overhead, with margins that are attractive enough through micropercentage fees on microtransactions.  Billions and zillions of microtransactions.

Think about it.

If Amazon and iTunes can make 40% of their profits from the zero overheads of stocking the zillionth book and song, then banks can make profits from the zero overheads of processing payments transactions through internet, prepaid and mobile on the banking network.

That’s something that rings of the long tail of banking isn’t it?

Comments

[Michael Megalli]

Great post Chris. The "long tail of banking" is something that we have have been doing quite a bit of thinking about as well.

There is no question that as the barriers to distribution disappear (the penetration of mobile devices/infrastructure in emerging markets a key driver here) money will begin to operate a lot more like software. The destabilizing effects of this on "business as usual" banking will be profound (just ask people in the music business).

Banks are fortunate that they can reference the lessons learned by other industries as they formulate their strategy for dealing with this seismic change. It doesn't seem like many are taking advantage, however. Banking innovation is being pushed to the fringe. Much in the same way as it is in the software business.