Almost every recent article written about banking starts with the statement that the banking industry is being disrupted
by new competitors, new innovations and new technologies. Although this statement is definitely true, the extend of the disruption can still be debated. Even the most innovative neo-banks still work with bank (current, saving, term and investment)
accounts, cards (credit and debit), traditional credits, existing payment infrastructure… The user experience surrounding the origination and servicing of these products has dramatically improved (and will continue to evolve), but the underlying banking products
are not really disrupted.
You could argue that banking products are so intertwined with society and our way of thinking about finance, that they can’t be disrupted, but looking at those products you cannot ignore that they are far from an optimal solution in our current digital world.
Let’s consider cards for example. Isn’t it strange, we are still carrying around one debit card per current account and one or more credit cards? Not only are those cards taking a lot of space in our wallets, pose a high security risk (who
hasn’t had to call card-stop to block all his cards, after he lost his cards or his cards were stolen), get easily broken and cost a lot of money for banks to produce and replace every X years, but those cards are also a very ineffective way to transact with
(searching the right card, putting the card in a terminal, entering PIN code…). With the rise of the smartphone, virtual "cards" (wallets, such as Apple Pay and Google Pay) communicating via NFC to terminals and authenticating via biometrics on your phone
(instead of having to input a PIN on the terminal) are a big step forward in usability and security. Once the cards get fully digitized and your smartphone can effectively communicate with the terminal or cash register, we can imagine all kinds of nice extensions,
like automatic linking of a loyalty card (cfr. Joyn integration with Payconiq), automatic transfer of the cash register ticket, warranties and other important documents related to your acquisition into your document vault, automatic exchange of coupons (both
consuming coupons as receiving new coupons), automatic update of my personal information (upon user consent)… Imagine that all those currently manual exchanges (cash ticket, coupons, warranties, loyalty card, personal data…) would be handled in 1 digital
If this 1 payment transaction is furthermore processed by a blockchain or a central party (like Libra), which is internationally used and accepted, the money could be exchanged in a matter of milli-seconds at a fraction of the costs (just like sending a message),
even to someone at the other side of the world.
Same applies for credits. With banks being specialists in liquidity management and knowing almost every financial aspect of your live (especially now with the rise of Open Banking), it’s strange that credits are still so inflexible, static
products, which require customers to compare multiple credit products and calculate themselves what is the most suited credit for their current financial situation. An interesting article to read on this topic is the blog of Capilever on "Are credits not too
commoditized?" (https://www.capilever.com/blog-10), which describes some ways how credits can evolve, ultimately transforming banks from product-silo organizations into "Money as a Service" companies.
This brings us to the actual subject of this blog, namely the concept of a bank account. If banks would be transformed to customer-centric "Money as a Service" companies, it’s hard to believe that concepts like current accounts, saving accounts
and term accounts continue to exist. Already today banks are struggling with the concept of accounts, while they implement features like account aggregation, PFM tools, saving goals… All those features put a layer on top of accounts in order to give a more
customer-centric visualization and management, but in the end the actual interactions (e.g. a payment or an account opening) still happen on the underlying account-layer. What if we could get rid of this underlying account layer, i.e. instead of having multiple
accounts (of different types and with different holder structures) you would only have 1 pool of money, with the bank continuously maximizing interests on the full pool and keeping track of ownership of every cent.
Suppose a typical household with 2 children. Such a household could for example have 9 different accounts: 2 individual current accounts, 2 individual saving accounts, 1 joint current account, 1 joint saving account, 1 joint term account and 2 children saving
accounts. If we count furthermore that many people are customer at different banks and many banks require to open an account to become a customer, the number of accounts can even further increase.
The result is a multitude of accounts, some of them charging costs and often each current account issuing a separate card (resulting in my exploding wallet - see above), between which people need to switch money continuously. Without careful
management of these money flows, additional costs are likely to incur, like debit interest rates, fees for direct debits or standing instructions which could not be executed due to insufficient funds or missed credit interest rates as money was not moved in
time to a higher-interest saving or term account.
Of course, these different accounts help to achieve and organize your financial goals and each account has a purpose but should this not be handled more dynamically by the PFM layer on top, rather than by the account layer.
This gradual reduction of accounts could be organized in different steps:
Avoid having to open accounts at niche players. PSD2 payment initiation combined with instant payments, allows to use an account at another bank to handle the payments for investments or credits (without delays and risks for the niche player
Review the cross-selling rules of most banks to open an account, when acquiring a credit or other product. Banks usually do this to build out a further relationship, but also as an aid to do better (credit) risk management. The first reason
can be perfectly replaced by more customer-centric products than an account and the 2nd reason via enforcing the creation of a PSD2 consent on the account at the customer’s primary bank.
Consolidate different account types (current, saving and term accounts) into 1 pool of money. For the customer there would only be 1 account number and 1 payment card linked to this account. The bank would ensure that the full pool of money
is always fully liquid, while at the same time, the bank can internally determine (via AI models) how much money is (most likely) required to be liquid. Based on this prediction, the bank can calculate a weighted average interest rate on the full money pool:
with money expected to be used soon getting the interest rate of a current account, money expected to be used within 1-3 months a saving account rate and money with less liquidity needs receiving different rates applied to term accounts of different durations.
This means that virtually there is still some kind of allocation to different liquidity needs, but this is completely abstracted away from the customer. The customer has always all money perfectly liquid and interest rate on the money is dynamic and determined
by the expected stability (calculated based on the past) of the cash. A Fintech like Chip puts a first step in this direction, but is still working with underlying accounts and transferring money automatically from one account to another.
Even accounts with different owners within the same household could be consolidated in 1 pool. The bank could keep track of who brings in what and who pays what (of the different account holders) and can keep (together with some automatic
rules and user preferences) as such track of how much in a money pool belongs to each holder.
When traditional cards, accounts, credits and payments will be a thing of the past, we will really be able to talk about a disruption in the financial services industry.