Beyond the Credit Crunch – Borrowing Ideas from Web 2.0 to Grow Your Bank
By Joe Trafton, Senior Vice President and Chief Strategies Officer, COCC

What a difference a year can make! One year ago, a barrel of oil cost $58 and most mortgages, brokers and agencies were solid. Back then, banks had time enough to consider the next big market segment – Gen Y – and the next big technology – Mobile Banking.

Not any more!

Today’s bankers are focused on surviving one day at a time, and while that makes sense in today’s volatile credit market, keeping an eye on emerging strategies, competitors and service channels should never be far from any banker’s mind.

You see, while bankers have been busy fretting about real estate values, credit quality and liquidity, their Web 2.0 counterparts have been dreaming up a new blend of finance and social networking called ‘social finance.’ Its market share is expanding rapidly and could take the world by storm like ING Direct which accumulated a staggering $63 billion in just three years. We could learn a lot from this Web 2.0 banking model.

Social finance companies such as Prosper and Zopa entered the banking market in 2005. Backed by global investment companies such as Benchmark Capital, Fidelity Ventures, and Wellington Partners, the social financiers attempt to reach a younger demographic with several blends of financial services and social networking.

So far, Prosper has attracted more than 500,000 members in the US while Zopa had attracted around 200,000 in the United Kingdom prior to arriving in the US late in 2007. Neither company reveals its current product numbers or total assets. 

The social finance concept is simple – the borrowing members take out small loans ($25,000 or less) while other members invest in those loans. Prosper conducts an online auction where investors bid on the borrowers’ loan requests. Once the auction ends, Prosper combines the lowest rate bids into a single loan to the borrower. Prosper then handles the on-going loan repayment, reporting and collection tasks on behalf of the matched lenders and borrower.

A similar process occurs with Zopa. Here the investor buys a one year CD and understands that he (or she) must donate a portion of the yield to reduce the monthly loan payment for one of Zopa’s borrower. The portion can be as little as one tenth of one percent. Zopa borrowers create special profiles that explain their reasons for borrowing, and investors review the profiles to decide who to help. Zopa borrowers are encouraged to ‘market’ their profiles to friends, family and others willing to help them with their loans.

Obviously, this ‘get-to-know-your-borrower’ concept is quite different from traditional banking where deposit customers rarely know the borrowing customers — although the connection certainly exists in portfolio lenders. The Web 2.0 version of lending establishes a more direct connection where the depositor actively helps the borrower. The concept evokes strong allegiances between lender, depositor and the social finance company.

Add competitive rates and a guaranteed return, and these social finance companies stand a good chance of increasing their market share beyond current levels. At this writing, Prosper offers a loan rate as low as 7.68% while Zopa offers 8.48% minus the contribution of well-meaning investors.

Could a more traditional bank jump into the social finance game? Of course! Banks have well-established – and regulated – underwriting and collection practices. Add the advantage of ties to the local community and the social finance model may be just the ingredient that helps build a community bank’s market share in these turbulent times.

The following ideas borrowed from the social finance model and other Internet banking entities that can help you expand your business and compete against the emerging Web 2.0 companies:

• Larger Loan Amounts. Prosper, Zopa and others have limited themselves to the small end of the market with their $25,000 caps. Since a community bank can make large as well as small loans, this could be your ticket to flexing your community bank’s muscles – both on the Internet and in your flesh and blood community.
• Online Customer Contact. Beyond the ‘contact us’ and ‘account application’ forms, consider staffing a true online messaging web page with a bank professional. Your customers want more than a new account or a balance update – they want professional financial advice. Consider scheduling your staff for key times of the online banking customer’s day. The hours will be more like 6 p.m. - 10 than 9 a.m. to 4, but that’s when your customers are home from work and need your expertise the most.
• A human Internet Branch Manager. Many bankers believe Internet banking is a completely automated solution that requires little human intervention beyond troubleshooting. Perhaps it’s time to revisit that idea. If your bank is serious about Internet banking, then it might well consider staffing its Internet branch with a flesh and blood manager. Who else will develop a unique feel for the branch and make sure the Internet customers are treated right? Who else will respond promptly to customer inquiries and promote the branch by hosting Internet-only programs? Just as physical branches need a manager, your Internet branch needs one, too.
• Avoid Internet Traps. Blogs, MySpace and interactive games may sound like the ticket to Internet success, but so far, they have brought little value to banking. When considering a blog or tell-all pages for your bank’s customers, ask yourself if your customers really want to splash their financial profiles to the masses? And if they did and they regretted it later, would you want to defend the bank for revealing non-public customer information online? As for interactive games, a recent visit to Wells Fargo’s Stagecoach Island game found only 19 people across the entire U.S. playing the game. That’s hardly a groundswell of interest, and I doubt that it resulted in much business for the bank.
• Incentives, Yes; Penalties, No. It’s a great temptation to offer Internet-only rates for loans and CDs, but try denying the customer in your lobby who prefers to open his or her account in person. If your goal is to expand customer relationships, then expand them whenever and wherever the customer contacts you. Rather than Internet-only, think bank-only, and the Internet as just another means to communicate the message.
• Listen Carefully to Your Customers. Lobby conversations can reveal a great deal about new products and service channels, and your customers can give you excellent ideas that will separate your bank from the rest. The key is listening and separating the wheat from the chaff. The Internet whiz kids who design systems such as Prosper and Zopa will never know what your customers tell you – and that’s to your advantage.
• Keep looking at the new models. Like ING Direct, one of the Web 2.0 models will break through the clutter and become a winner. When it does, you will want to follow soon after, preferably with an improved product. That’s why early detection and regular attempts to answer the perennial question “How did they do that?” are so valuable. They give you a head start on overtaking the leader.

These are sobering times for every banker, and we will be watching Fannie and Freddie for some time to come. But these sobering times will end, and when they do, more of your customers will be online than they are today. Keeping an eye on Web 2.0 will help you prepare for them and keep your bank strong in the future.