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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:

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

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

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

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?

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • 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.