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Social finance is right here, right now

The last two days covered social media and social networks, and their relevance to banks.

The conclusion is that banks cannot ignore these developments, and need
to use these communication capabilities to engage their audience in a
conversation that advises, supports and educates potential customers in
their financial capabilities.

This advice, support and education can build into a relationship and a
trust that might generate future account openings, but that is not the
primary intention. The primary intention is to build trust.   After
all, banks have lost so much trust this year, this must be a strong
reason for social networks and media to be used as a critical platform
for future business.

For today and tomorrow, let’s look at going beyond advice and trust and
see what new business models are developing around these themes.

From a social networking view, the most popular developments are around investment networks, such as Seeking Alpha, Social Picks, and the re-energised Motley Fool.

These are social networks for bankers and day traders seeking
investment tips, and serve an interesting function in aggregating the
views of the populous.  This can therefore provide tips for where to
avoid (where they’re investing) and where to invest (where they’re not

Above this level, the main areas of financial activities are focused around lending, saving, budgeting and managing money.

In the latter two categories, services such as Mint and Wesabe have staked a strong claim to fame.

These services allow you to create a structured analysis of your saving
and spending habits, and they proactively analyse your habits to help
you manage them better. They will alert you when you’re breaking your
deposit balance rules, such as having too much or too little cash in
your account. Similarly, they will tell you where you can find a better
deal and offers suited to your financial habits.

How they do this is very similar to Amazon. Just as Amazon compares
your buying habits every time you buy a book, CD or game, in order to
recommend other books, CDs and games, Mint and Wesabe analyse all the
people like you and recommend financial products, services and firms
that might suit you better, based upon your profile and the profile of
people like you.

This leads to the best banking service I’ve seen launched this year, which is Tu Cuentas from BBVA.

Tu Cuentas means “You Count” in English, and provides Mint and Wesabe style functionality, but from a bank.

BBVA will compare your profile with all the other BBVA customers, in
order to give you alerts and offers with great precision, but it goes a
lot further than this through aggregation services, budgeting services,
investment services and alerts.  It allows you to access Tu Cuentas services using Blackberry, mobile and internet platforms. It even allows you to use bits of Tu Cuentas services
as widgets, which you can pick up and drop into any other web
applications. So I could drop my bank balance and alerts on my Google
personalised home page.


These are all social banking services focused upon better financial management using digitally socialised tools.

Then we have new business models, such as social lending.

Social lending first appeared in March 2005, when the UK’s Zopa service was launched.

Since then, Zopa style lending services have appeared everywhere, from
Smava in Germany to ppdai in China. In fact, in these times of the
credit crunch, where people can no longer get access to funds from
banks, social lending has become indispensible.

The basic premise of social lending is to create an eBay style platform for savers and borrowers.

The savers’ savings fund the borrowers’ borrowings, just like a bank,
but the difference is that these businesses offer no financial
management themselves.  They are just a platform to connect savers who
want a higher return on their savings, and borrowers who want a lower
interest rate on their loans.  These platforms just connect them and
claim that there is no financial management taking place.

Zopa, Smava, ppdai and related firms are therefore like eBay.  eBay
makes nothing but just connects buyers and sellers and, in the same
way, these firms purely connect savers and borrowers. This is why Zopa
falls outside the remit of the FSA, although they are regulated now as
a result of offering insurance on their loans.

They also win out because they are small and nimble, with few staff or
overheads which means that they can offer a service with minimal spread
on the difference between borrowing and saving rates. As a result, they
undercut bank rates significantly with a 0.5 percent spread.

This is why social lending works.

It is now without issues however.  For example, this is why the US Government is trying to shut some of them down.

The problem with the service, as cited by the SEC, is that loans are
not being repaid and this is the challenge for these sites: to get
enough liquidity to be able to cover all the borrowings required, and
to manage the risk of those borrowings.

Many of the social lending sites cover these risks by using Experian,
Equifax and other credit rating agencies, or through the offer of
insurances, but any squeeze on funding strains the social lending
business model.

That is why there are other things happening of interest to add to the social lending concepts, such as SmartyPig.  SmartyPig takes the social lending model and applies it to savings.

The way it works is that you setup an account and create a savings
goal, such as saving for a car or a college education or to pay off a
mortgage.  As you save towards your goals, you tell the world by
placing the SmartyPig widget on your social network page, blog or
website.  Lo and behold, all your friends and family can contribute
towards your savings goals.

This is very friendly and very family oriented.

As a result, SmartyPig had customers in all 50 states within three
months of launch in the USA are now partnering with other banks, such
as ANZ, to launch a white labelled service in Australia.

And these social models are not restricted to just the retail markets,
although I guess we would call them Web 2.0 applications in the
investment markets as there's nothing social about those markets.

For example, in the investment and trading space, you could say that
Europe's new stock exchanges – Chi-x, Turquoise, BATS et al – are
social exchanges.  After all, they are new exchanges trading at minimal
spreads by using the latest internet technologies to offer trading
platforms that have virtually zero overheads.

It’s not social, but it’s very similar to the structures of Zopa and similar companies in concept.

There’s even an eBay for traders out there today. It’s called Bidroute.

There are many other examples of new social style financial and banking
offers, and is an area that warrants almost a book of words to

For the brevity of today, I contend that the world of social banking is
developing fast. There are many firms out there building social models
for finance, ranging from social advice to social lending and saving to
social trading and dealing.

Every aspect of social media and social networking can be applied effectively to banking models.

The difference in this world is one golden rule.

You are offering a platform for lower cost banking and trading for
those people who like to serve themselves by participating.  They
participate because they believe it offers better value and service.

These new models are not pushing a product to customers.  They are offering a platform to participants.

This golden rules is probably the hardest lesson for a bank, and will
mean that most will follow or acquire these new business models, rather
than invent or create them.

That’s my guess anyway.

More on these themes tomorrow as we explore social money.

About Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.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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