Guest editorial

Citation

Nejad, M.G. (2016), "Guest editorial", International Journal of Bank Marketing, Vol. 34 No. 1. https://doi.org/10.1108/IJBM-06-2015-0094

Guest editorial

Article Type: Guest editorial From: International Journal of Bank Marketing, Volume 34, Issue 1.

Challenges and opportunities for innovation in financial services

Introduction

Innovations within the financial services industry have significantly improved the way firms conduct business, the well-being of different societies, and the financial transactions that are part of our day-to-day lives (Sandor, 2012). The history of money, credit, and insurance dates back several millenniums and the modern banking services were introduced in the fourteenth century (World Economic Forum, 2012). As financial transactions became more complex, so did the intricacies of the developed services. Innovations in the last few decades include credit cards, automated teller machines, online and mobile banking, online stock trading, credit monitoring services, new ways to transfer funds, peer-to-peer lending websites, digital currencies, complex and synthetic securities, exchange-traded options, and credit default swaps, just to name a few. Researchers estimate that the number of innovations introduced in financial services over the last two decades exceed that of all previous times. Financial services innovations are distinct from those in other sectors as they are closely entwined with the economy and virtually every industry and society as a collective whole (Estelami, 2012; Sandor, 2012; World Economic Forum, 2012).

This special issue presents the latest research on new service development and innovations in financial services. Before introducing the papers in this special issue, I would like to discuss three major areas related to consumer financial services that require special attention from both researchers and managers. These are: the unserved or underserved people; financial institutions versus high technology companies; and virtual currency and the established financial system. The next three sections explain these areas.

The unserved or underserved people

Several recent reports by the Federal Reserve and the Federal Deposit Insurance Corporation estimate that close to 28 percent of Americans are somehow disconnected from the mainstream financial system (Federal Deposit Insurance Corporation, 2014; Federal Reserve, 2014). These individuals are referred to as the unbanked or under banked population. According to the 2014 edition of the studies, 10.8 percent of Americans are unbanked, meaning that neither they nor their spouses have any checking, saving, or money market account. In total, 25 percent of these unbanked customers in the aforementioned study expressed that they did not have enough money; 24 percent mentioned that they did not need or want an account, and 10 percent of the respondents stated that they were unable to open an account due to past history or other reasons. Moreover, the report suggests that another 16.9 percent of consumers are underbanked, meaning that they use alternative financial services such as a payroll card, check cashier, or pawn shop in addition to using services from mainstream financial system (Federal Deposit Insurance Corporation, 2014). The numbers in other parts of the world do not reflect a better picture of utilizing banking services. A study by Master Card estimates that 93 Million people across western Europe are unbanked or underbanked (Master Card, 2013). The situation in other parts of the world reflects a less positive picture. About 2.5 Billion adults across the world do not use formal banks or semiformal micro-financial institutions for any transaction (Chaia et al., 2009). These numbers present both major challenges and opportunities for financial institutions.

Mainstream financial institutions have both a social responsibility to help consumers and a business imperative to not leave such a large group of individuals without choice for their financial needs. The literature on disruptive innovations suggests that many radical innovations are unable to compete with the incumbent market leader(s) in mainstream markets (Christensen, 2013). Incumbents hold a large market share and a strategic position in the market which enables them to charge high prices for their offerings. Moreover, a disruptive innovation offers new attributes that the main market customers are not accustomed to or may have not seen before. Many such innovations are also lacking in quality. However, the innovation is significantly less expensive than the market leader and hence may move to the underserved markets that are unattractive to the incumbent. The new product or service has the potential to grow in these secondary markets and improve in quality and market share. At some point in time, however, the main market becomes interested in this previously inferior product or service and makes a switch. At this point though, it is too late for the incumbent(s) to switch and offer this service or product and hence the incumbent(s) will be disrupted. Examples of such disruptive innovations in history include telephone and telegram, air transportation and train transportation, PC market and mini computers, and more recently, Netflix and Blockbuster (Christensen, 2013).

What type of innovative services can help the unserved or underserved population? One of the key problems of the unbanked and underbanked consumer population is a lack of financial literacy. Certain firms have recently focussed on fulfilling the needs of these markets. Bank of America has recently begun preparing programs (e.g. videos on YouTube) to educate people on adopting better financial habits. Such educational programs may help these individuals adopt better financial behavior and join the mainstream financial institutions. MasterCard and Visa have also started initiatives to help these individuals. These companies can alternatively focus on various groups of influential consumers (Nejad et al., 2014) to increase financial literacy among the individuals with lower degrees of financial literacy. Interestingly, a majority of the unbanked and underbanked individuals have access to mobile technology services (Federal Reserve, 2014). So, innovative initiatives relying on mobile technology can help these individuals.

Other startups and firms have also offered services for this group. InVenture (www.inventure.org/) has developed a new credit system that seeks to create an automated credit score for the about three billion unbanked or underbanked people across the world. Innovative mobile payment and money transferring services are becoming popular in developing countries. Examples are Paga in Nigeria and the Kenyan version, M-Pesa. Peer-to-peer lending websites that connect lenders with borrowers are another example of innovation within financial services. Zopa was the first company to offer peer-to-peer lending in the UK in 2005. The market has significantly grown and it is expected to reach US$350 Billion by 2025 (Reuters, 2015). The growth of such innovative services offers both major challenges and opportunities for financial firms and researchers.

Financial institutions versus high technology companies

The recent advances in information technology and mobile communications have led to innovative approaches to handling various financial needs. Financial institutions have offered one group of such innovations. Examples are online and mobile banking, managing investment and retirement accounts, and sending and receiving funds. These services are often offered as part of a financial institution's services without extra charge to customers. While technology companies may have assisted financial institutions in offering these services, the customers often receive the services directly from the financial institutions and not from a technology company. A second group of financial services are offered by startups and technology companies. Examples of such innovative approaches are mobile payment processing systems (e.g. Square, and Dwolla), centralized management of all personal financial activities (e.g. Mint), peer-to-peer lending platforms for individuals or businesses (e.g. Lending Club, Prosper, Zopa, and Funding Circle), sending and receiving funds locally or internationally and between different currencies free of charge or with very small fees (e.g. Venmo, Simple, Transferwise, and InVenture), and an automated new credit score for billions of people (e.g. InVenture). Some of these services, such as Square, have been adopted by major retailers such as Starbucks and Whole Foods (Rao, 2014) and others have received significant funding from larger companies which further underscores the importance of these innovations and their market potential.

Innovative approaches in other business sectors have revolutionized certain industries. For example, Uber has significantly affected the taxi and urban transportation services – an industry that had previously seen little reform over many decades. The degree to which the innovative financial services may change the highly regulated consumer financial services market is still unclear. Financial transactions are much more sensitive from a risk management perspective, and need to be overseen, ensuring customers' funds and preventing illegal financial transactions from taking place. The governing and overseeing authorities, such as central banks, have strict policies to fight against money laundering and the transfer of funds from illegal trades. There are concerns that some innovative approaches to financial transactions may be used for such illegal activities (Estelami, 2012; Sandor, 2012; Vigna and Casey, 2015).

Moreover, leading technology companies are offering certain types of financial services. Apple has offered Apple Pay, Google has long been working on Google Wallet, and Samsung has also acquired a startup to compete with both (Bell, 2015). How will these major information technology companies and the major financial institutions compete or co-exist in the consumer financial market? One group of companies may dominate the market or a co-branding or a collaboration between the two groups may occur similar to what happened in the case of credit card companies, banks, and others such as airlines or retailers. Many technology giants are investing heavily in non-public companies that offer innovative financial services. For example, Google invested $125 Million in Lending Club, a peer to peer lending club, in 2013 (Ford, 2014; Tam and Efrati, 2013). Apple succeeded in generating revenue from charging transaction fees to financial institutions on Apple Pay (about 0.15 percent from major financial institutions). However, Google has offered competitive fees (or no fees in some cases) to the financial system giants which seems to be in line with Visa and Master Card's recent policies on preventing any charges to credit card issuers (Barr and Sidel, 2015).

Another red flag for financial institutions is the fact that the overall customer satisfaction with banks has been volatile recently with several ups and downs (McGregor, 2014). Moreover, financial institutions are not among the most favored industries for millennial consumers. For example, a three-year study of millennials (defined as those born between 1981 and 2000) found that all top four leading banks are among the ten least loved brands by millennials (Viacom, 2013). Respondents in this study did not see any difference between their own bank and other banks and 70 percent of them believed that the way they make transactions is going to be different in five years. They counted on technology startups to shake the industry and believed that the radical changes will come from innovative companies outside of the financial industry (Viacom, 2013). In the USA, the student debt is at historically high levels which may further strengthen the younger generations' attitudes toward the financial system. Moreover, it also may change the way they make their financial decisions and behavior with regards to where and how to spend their money and what financial services to use for their financial needs. The evidence conclusively suggest further attention by managers and researches to this area.

Virtual currency and the established financial system

Among the innovative services offered in the financial sector, the introduction of digital virtual currency makes us question whether we are on the brink of a new era for financial services. Digital currencies are software systems that allow for the operation of a monetary system. They provide the means for sending and receiving value and exchanges (trades). The key difference between a digital virtual currency and any other currency is that virtual currencies are not backed by a central bank or by a government (Vigna and Casey, 2015).

Bitcoin is the most widely known used virtual currency among the more than 600 different types of virtual currencies now available in the market (Vigna and Casey, 2015). The value of Bitcoin has fluctuated significantly in the last few years. However, some major firms such as Dell have recently started to accept Bitcoin for the purchase of real goods while some companies such as Alibaba have stopped accepting it (Marino, 2015). IBM is currently evaluating a project that uses the same technology behind Bitcoin to transfer a different type of virtual money across the globe (Chavez, 2015).

Lawmakers in countries such as Russia and Hong Kong have sought to outlaw Bitcoin (Price and Ko, 2015). In China, buying any real good using virtual money has been banned since 2009 (Hongjiang, 2009). The US Internal Revenue Service[1] recognizes Bitcoin and other virtual money as a property and not as a currency (IRS, 2014) which at the very least indicates recognition by an important governmental entity. Virtual currencies have also raised concerns regarding theft and the possibility of use in illegal trade and illegal activities (Hongjiang, 2009).

The future is unclear. Virtual currencies may become like any other financial service or may have major consequences for the financial industry, the economy, and society. A majority of the today's digital virtual currencies will ultimately go out of business or be merged. Moreover, it is unlikely that traditional currencies will be discontinued. However, four major questions remain and require special attention especially due to the significant impact that they may have on the financial system. First, how will the digital virtual currencies change the financial system and will they ever become a popular currency? Second, how will digital currencies be regulated? Third, how will firms' and consumers' confidence in virtual currency change over time? Finally, how will the main-stream financial institutions react to digital currencies and to what degree are they vulnerable to the virtual currencies?

The papers in this special issue

This special issue comprises five papers. These papers focus on various issues including the patterns of new financial services development, the expectations of different stakeholders in mobile payment services in stores, the value of the use of social media by financial institutions to consumers, the effect of various communication means on consumers' attitudes toward adopting mobile banking, and a framework for the adoption of a mobile claim management system.

The first paper, "Financial institutions using social media – do consumers perceive value?" examines the consumers' perceived value from the use of social media by financial institutions and the effect it has on their use of social media to interact with the firm. The coauthors of this paper, Dootson, Beatson, and Drennan, examined their research questions using two data sets collected using similar instruments in 2010 and 2014. The study pinpoints the key determinants of perceived value and use in each of the points in time and find major differences between the determinants in the two points in time.

The second paper "Stakeholders' expectations of mobile payment in retail: lessons from Sweden," examines the expectations of three parties – the mobile service providers or the banks, the retailers, and the consumers – from the implementation of mobile payment services. The coauthors, Apanasevic, Markendahl, and Arvidsson study two different mobile payment service providers and two different merchants. The study identifies the key factors that will determine the wide-spread acceptance of the mobile payment services by the three parties.

The third paper, "Patterns of new service development processes in banking," studies the different patterns of service development in financial institutions. In this paper, Martovoy and Mention survey the executives and managers of innovation development units in financial institutions and identify four different patterns of new financial services development in Luxembourg. The study also finds that the cooperation between financial services firms and external partners varies across different stages.

In the fourth paper, "The impact of communication channels on mobile banking adoption," Tran and Corner examine the effects of three types of communication between firms and consumers--face-to-face, social media, and mass media – influence customer attitudes toward using mobile banking in the innovation diffusion process. The study finds differences between the influences of the three communication channels on consumers.

The last paper in this special issue, "Mobile claim management adoption in emerging insurance markets: a case study in Thailand," examines the adoption of a mobile claim management system for an insurance company. Collecting data from interviews with the company executives as well as surveying consumers, the co-authors – Gowanit, Thawesaengskulthai, Sophatsathit, and Chaiyawat – identify various external (social) factors that influence consumers' attitude and behavior toward using the system.

Conclusion

New services development and innovations in financial services entails certain challenges and offers opportunities for academic research as well as practice. As a recent report suggested, "innovation leads to situations for which there is no history" (World Economic Forum, 2012, p. 7). So, the challenges and opportunities exist but given the close relationship between the financial industry and other sectors of business, it is important to try to increase the benefits of such innovations and reduce the potential risks (World Economic Forum, 2012). The areas discussed in this editorial and those presented in the research papers in this special issue each highlight part of these challenges and opportunities.

Dr Mohammad G. Nejad

Department of Marketing, Fordham University, New York, New York, USA

Acknowledgments

The author thanks the co-editors of International Journal of Bank Marketing, Professors Hooman Estelami and Kent Eriksson, especially to Professor Estelami for his support during this process. The author also would like to thank the reviewing team, Professors Thijs Broekhuizen, Ana Casado-Diaz, Judy Drennan, Mark Durkin, Abdelghani Echchabi, Muahmmad Kashif, Kenneth Hyde, Joanne McNeish, Florian Moser, Vishal Mishra, Nicole Koenig-Lewis, and Julio Puschel. They spent their invaluable time reviewing the papers and offered constructive comments which helped the authors improve the quality of the papers. The author hopes that the both researchers and managers in the area of financial services will find this special issue interesting and beneficial.

Note

1. "The US government agency responsible for tax collection and tax law enforcement" (www.irs.gov).

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Corresponding author

Dr Mohammad Nejad can be contacted at: mailto:mnejad@fordham.edu