When More Friction in Banking Makes Sense

On occasion, conventional wisdom gets debunked – without anyone noticing it.

That’s exactly what happened at our recent Bank Innovation 2015 in Seattle.

The conventional wisdom in question here is the notion of friction, or, more specifically, that friction needs to be wrung out of the banking process with digital tools and services. As one attendee tweeted, “The key message from [the] demos at Bank Innovation 2015: ‘remove friction.’” In fact, a running joke started to develop at Bank Innovation 2015, with attendees predicting how soon after sessions started that a speaker would use the word “friction.”

It turns out the opposite is true, that “removing friction” is a banking theme deserving attention. Let me explain.

First, some behind-the-scenes background. As you no doubt know, we conducted a contest in advance of Bank Innovation 2015 called the DEMOvation Challenge, to give out five complimentary demo slots to worthy, innovative startups. A team of judges chose the winners from a wide variety of nominees.

I favored one of the applicant startups to win – and I got overruled. That startup which just narrowly was passed over was Koho, a Vancouver-based online banking venture. My fellow judges did not think there was enough novel in yet another online banking startup, and their argument was hard to overcome.

For some reason, Phil Ryan, my fellow editor, and I thought there was something unique there, so we invited Koho to demo anyway. Indeed, Daniel Eberhard, Koho’s founder, came down to Seattle from Vancouver to conduct the demo.

I share this backstory, because it was buried in Daniel’s demo that the “remove friction” conventional wisdom was debunked, certainly in part.

Daniel explained a unique feature of Koho that allows users to shut down its functionality in certain cases – to add­ friction, not remove it. Add friction? What scenario would merit more friction?

Here’s the scenario:

You are going out with your friends on a Saturday night. You know it will be a late night, that there will be lots of drinking, that some “craziness” will ensue. Hours before even the pregame starts, you come to your senses and realize, I need to make sure I don’t do something really stupid, like blow a boatload of money. So you add friction by restricting your bank card from withdrawing more than $40, just enough to make sure you get home in a taxi.

Koho, which has yet to officially launch, lets its users set up such barriers. For example, a user can set a rule that allows for withdrawals of only a certain amount between 12 am and 4 am on Saturday nights. Such friction could save the customer from financial harm, and it is, in my view, just as important to improving fiscal gain as removing friction (when the customer’s thinking is not clouded by tequila shots).

Joking aside, there are many ramifications for this ability to add friction, and I could certainly see a day when “smart friction” might get deployed. For example, let’s say a withdrawal is requested at 2:30 am after credit card charges at a bar for said tequila shots for an amount that is beyond the customer’s norm. The bank could “smartly” restrict the withdrawal to just $40 for a taxi.

Is this Big Brother-ly? Sure. But such proactive “smart friction” all boils down to how helpful it is, or whether it is invasive. Consumers want their banks to help them, not penalize them. “Smart friction” might come to help consumers, and I’d drink to that.