Bloomberg News

Speed-Dating the Bankers: Finovate and How Tech Is Changing Money

June 13, 2013

The Future of the Digital Wallet

A smartphone reads a credit card. Photograph by Jin Lee/Bloomberg

Twice a year, Jim Bruene puts three dozen of the country’s most innovative entrepreneurs on a stage and starts a stopwatch. In seven minutes, they must show how their latest idea could transform the financial industry.

The presenters at Finovate, the conference Bruene first organized in 2007, try to wow bankers, venture capitalists and tech executives with cool graphics and idiot-proof interfaces. The typical demo strives to prove that banking, investing and managing money can be easy as swiping a finger across a screen.

The star of the first Finovate was personal finance management site Mint.com; two years later, Intuit bought Mint.com for $170 million. More recently, Lending Club, which has presented three times at Finovate, got a $125 million investment from Google that valued the peer lending site at $1.6 billion.

A former banking executive, Bruene started the "Online Banking Report" in 1994. He still publishes the industry newsletter, though Finovate is now far more lucrative. Last month's San Francisco Finovate attracted almost 1,300 people, and tickets to its next gathering in New York on Sept. 10 and 11 sell for $1,295 and up. The company added yearly events in London in 2010 and Singapore in 2012.

Bruene, 54, spoke to Bloomberg.com’s Ben Steverman about how technology is changing the way we spend, save and invest -- and whether we’re likely to use our phones as “digital wallets” any time soon. Edited excerpts of their conversation follow.

Are you an early adopter of innovative financial products in your personal life?

I am pretty hands-on when it comes to “fintech” and try to use as much as I can. I’ve been using [mobile payments app] Square Wallet at a few coffee shops in Seattle, along with the Starbucks mobile app. I have accounts at online bank Simple and at peer-to-peer lenders Lending Club and Prosper.

What are the latest trends in financial technology that you’re seeing?

The most interesting thing now is “crowdfunding.” Person-to-person lending like Lending Club and Prosper fall into the same category. It’s always been tricky for banks to make smaller business loans. In the last five years especially there was an ice age for a while. Right now investors are putting money in these things because, if you can loan some money out to a business or an individual for a 6 percent interest rate, you’re fairly happy as an investor. You can fund all kinds of different assets.

There’s a company called Mosaic that does solar installations. You’re putting your thousand dollars into a solar installation in Phoenix that’s going to give you a 7 percent return over three years on your money.

What about concerns about loan quality on these online lending sites?

Loan quality will always be an issue. Some of the initial lenders lost quite a bit of money in Prosper in 2006 to 2008, sometimes losing 10 to 20 percent of principal. In the last three years, Prosper and Lending Club have tightened underwriting standards and have kept loss rates at a reasonable level. Consumers investing through these sites don’t have absolute security like FDIC savings accounts, but they are being compensated for the extra risk.

Overall, the risk-adjusted returns seem reasonable now. Other crowd lenders targeting small businesses and other assets may have wildly fluctuating returns and are only accepting accredited investors at this point.

How is the widespread adoption of mobile phones affecting the financial industry?

Mobile technology is one of the reasons we started Finovate. Technology is changing how people bank -- from at a branch or over a voice phone call to online and mobile.

Right now, authentication and biometrics through mobile phones is the hot area. As we just saw at a Finovate conference in San Francisco, the way you type on the phone, the way you walk with the phone -- these are all indicators that the phone is in its owner's hands. From a consumer standpoint, authentication technologies can take away a little pain point -- the need to log in to check your balance or take a payment.

I’d imagine for the banks it could take away a huge pain point, which is credit card fraud.

Yes! Fraud and fraud resolution -- all those phone calls you get from your credit card company saying, “Did you make this transaction?” That stuff is expensive and aggravating.

There are many different ideas for how to use a mobile phone as a “digital wallet,” as a payment method. There are competing technologies, and commentators have pointed out that it’s not really that hard to use a credit card. Is this a solution in search of a problem?

There’s no doubt that the physical wallet goes away eventually. A plastic card is a little token to this vast computer payment system. So why would we have it if it worked better on the phone? If it knew who you were and it was all secured. Eventually this all ends up in some kind of a cloud.

When’s the “eventually”? Fifty years from now, or 20 years from now? I don’t think it’s five years from now. It’s fairly out there, because the infrastructure of how to pay has to change. That’s the kicker. If every place that you walked with your phone took it as a payment device, then you’d use it. That’s not the case. There’s this problem of retrofitting payment terminals.

In the meantime, you can make the credit card work better, preventing fraud by using the phone to prove it's you using the card.

One aspect of the mobile “digital wallet” that’s discussed a lot is personal financial management, or PFM. The focus there isn’t so much on the transaction itself as on everything that happens before and after, such as mobile apps that can help consumers make better spending and investing decisions. What do you think of PFM?

My advice to banks is to provide all those things and call it a “mobile wallet.” Let all your transactions flow into your phone instantly. Some people say you can’t do all this stuff in the phone -- it’s too limiting and you need the keyboard and the real estate of the personal computer. No, it’s better in the phone, because it’s instantaneous. You can get it whenever and whereever you want to.

I love what the bank Simple calls their Safe to Spend meter. This little meter runs on your phone or desktop. It keeps track of your bills and your paycheck and it says: Stop spending, because you don’t have anything left after your mortgage that’s due in six days.

To what extent do you expect technologies to really disrupt the financial industry, and to what extent will financial institutions step up and do the innovations themselves?

Certainly in the stock trading world and in investment advice there’s been a lot of new players, like TD Ameritrade.

On the banking side, the traditional players have the same market share of deposits as they did 18 years ago, when the Internet got popular. Consumers are risk-averse with their money -- they don’t glom onto the latest thing they heard about on Twitter. Also, it’s a hassle to change accounts, and in banking the existing players have stepped up and done what consumers want.

On the lending side, there’s more chance of disruption, especially with crowdfunding. As a consumer, how do you shop for a line of credit or even a mortgage? It’s hard. It’s not transparent. You don’t know if you have a good deal until you apply for it. That’s an area where new players can make inroads. Plus, borrowers will take money from anyone. That’s proven in the credit card world. When people get that pre-approved mailer, they don’t care whose name is on the envelope.


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